-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SqUAPV0xYjrHqFP/ir/ydRgojSA2qXZkXfY0/r14EuxQ9YbmJQPhG4OJ4doQHCHY qfvakY6eQPQrZKE2DVNsTg== 0000950117-06-001118.txt : 20060310 0000950117-06-001118.hdr.sgml : 20060310 20060310164410 ACCESSION NUMBER: 0000950117-06-001118 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060310 DATE AS OF CHANGE: 20060310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASTORIA FINANCIAL CORP CENTRAL INDEX KEY: 0000910322 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 113170868 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11967 FILM NUMBER: 06679868 BUSINESS ADDRESS: STREET 1: ONE ASTORIA FEDERAL PLAZA CITY: LAKE SUCCESS STATE: NY ZIP: 11042-1085 BUSINESS PHONE: 5163273000 MAIL ADDRESS: STREET 1: ONE ASTORIA FEDERAL PLAZA CITY: LAKE SUCCESS STATE: NY ZIP: 11042-1085 10-K 1 a41436.txt ASTORIA FINANCIAL CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2005 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 001-11967 ASTORIA FINANCIAL CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) Delaware 11-3170868 - ------------------------------ ---------------------------------- (State or other jurisdiction (I.R.S. Employer Identification of incorporation or Number) organization) One Astoria Federal Plaza, Lake Success, New York 11042 (516) 327-3000 - ------------------------------ -------------- -------------------------------- (Address of principal (Zip code) (Registrant's telephone number, executive offices) including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each Exchange Title of each class on which registered - ------------------------------ -------------------------------- Common Stock, par value $.01 New York Stock per share, and related Exchange preferred share purchase rights Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [X] NO [ ] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES [ ] NO [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2005, based on the closing price for a share of the registrant's Common Stock on that date as reported by the New York Stock Exchange, was $2.96 billion. The number of shares of the registrant's Common Stock outstanding as of February 15, 2006 was 104,060,924 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement to be utilized in connection with the Annual Meeting of Stockholders to be held on May 17, 2006 and any adjournment thereof, which will be filed with the Securities and Exchange Commission within 120 days from December 31, 2005, are incorporated by reference into Part III. ASTORIA FINANCIAL CORPORATION 2005 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Page Part I Item 1. Business ....................................................................... 2 Item 1A. Risk Factors ................................................................... 29 Item 1B. Unresolved Staff Comments ...................................................... 32 Item 2. Properties ..................................................................... 32 Item 3. Legal Proceedings .............................................................. 32 Item 4. Submission of Matters to a Vote of Security Holders ............................ 33 Part II Item 5. Market for Astoria Financial Corporation's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ........................................................ 34 Item 6. Selected Financial Data ........................................................ 36 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................................... 38 Item 7A. Quantitative and Qualitative Disclosures about Market Risk ..................... 67 Item 8. Financial Statements and Supplementary Data .................................... 69 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......................................... 69 Item 9A. Controls and Procedures ........................................................ 70 Item 9B. Other Information .............................................................. 70 Part III Item 10. Directors and Executive Officers of Astoria Financial Corporation............... 70 Item 11. Executive Compensation ......................................................... 71 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .............................. 71 Item 13. Certain Relationships and Related Transactions ................................. 72 Item 14. Principal Accountant Fees and Services ......................................... 73 Part IV Item 15. Exhibits and Financial Statement Schedules ..................................... 73 SIGNATURES ................................................................................ 74
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT This Annual Report on Form 10-K contains a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements may be identified by the use of the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "outlook," "plan," "potential," "predict," "project," "should," "will," "would" and similar terms and phrases, including references to assumptions. Forward-looking statements are based on various assumptions and analyses made by us in light of our management's experience and its perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate under the circumstances. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors (many of which are beyond our control) that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. These factors include, without limitation, the following: o the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control; o there may be increases in competitive pressure among financial institutions or from non-financial institutions; o changes in the interest rate environment may reduce interest margins or affect the value of our investments; o changes in deposit flows, loan demand or real estate values may adversely affect our business; o changes in accounting principles, policies or guidelines may cause our financial condition to be perceived differently; o general economic conditions, either nationally or locally in some or all areas in which we do business, or conditions in the securities markets or the banking industry may be less favorable than we currently anticipate; o legislative or regulatory changes may adversely affect our business; o technological changes may be more difficult or expensive than we anticipate; o success or consummation of new business initiatives may be more difficult or expensive than we anticipate; or o litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, may delay the occurrence or non-occurrence of events longer than we anticipate. We have no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document. 1 PART I As used in this Form 10-K, "we," "us" and "our" refer to Astoria Financial Corporation and its consolidated subsidiaries, principally Astoria Federal Savings and Loan Association. ITEM 1. BUSINESS General We are a Delaware corporation organized in 1993 as the unitary savings and loan association holding company of Astoria Federal Savings and Loan Association and its consolidated subsidiaries, or Astoria Federal. We are headquartered in Lake Success, New York and our principal business is the operation of our wholly-owned subsidiary, Astoria Federal. Astoria Federal's primary business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowings, primarily in one-to-four family mortgage loans, multi-family mortgage loans, commercial real estate loans and mortgage-backed securities. To a lesser degree, Astoria Federal also invests in construction loans and consumer and other loans, U.S. government, government agency and government-sponsored enterprise, or GSE, securities and other investments permitted by federal laws and regulations. Our results of operations are dependent primarily on our net interest income, which is the difference between the interest earned on our assets, primarily our loan and securities portfolios, and our cost of funds, which consists of the interest paid on our deposits and borrowings. Our net income is also affected by our provision for loan losses, non-interest income, general and administrative expense, other non-interest expense and income tax expense. Non-interest income generally includes customer service fees; other loan fees; net gain on sales of securities; mortgage banking income, net; income from bank owned life insurance, or BOLI; and other non-interest income. General and administrative expense consists of compensation and benefits expense; occupancy, equipment and systems expense; federal deposit insurance premiums; advertising expense; and other operating expenses. Our earnings are significantly affected by general economic and competitive conditions, particularly changes in market interest rates and U.S. Treasury yield curves, government policies and actions of regulatory authorities. In addition to Astoria Federal, Astoria Financial Corporation has two other subsidiaries, AF Insurance Agency, Inc. and Astoria Capital Trust I. AF Insurance Agency, Inc. is a life insurance and property and casualty insurance agency. Through contractual agreements with various third party marketing organizations, AF Insurance Agency, Inc. makes insurance products available primarily to the customers of Astoria Federal. AF Insurance Agency, Inc. is a wholly-owned subsidiary which is consolidated with Astoria Financial Corporation for financial reporting purposes. Our other subsidiary, Astoria Capital Trust I, is not consolidated with Astoria Financial Corporation for financial reporting purposes in accordance with Financial Accounting Standards Board, or FASB, revised Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51," or FIN 46(R). Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0 million aggregate liquidation amount of 9.75% Capital Securities due November 1, 2029, or Capital Securities, and $3.9 million of common securities (which are the only voting securities of Astoria Capital Trust I), which are 100% owned by Astoria Financial Corporation, and using the proceeds to acquire Junior Subordinated Debentures issued by Astoria Financial Corporation. Astoria Financial Corporation has fully and unconditionally guaranteed the Capital Securities along with all obligations of Astoria Capital Trust I under the trust agreement relating to the Capital Securities. We have acquired, and may continue to acquire or organize either directly or indirectly through Astoria Federal, other subsidiaries and financial institutions. We continue to evaluate merger and acquisition activity as part of our strategic objective for long term growth. 2 Available Information Our internet website address is www.astoriafederal.com. Financial information, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, can be obtained free of charge from our investor relations website at http://ir.astoriafederal.com. The above reports are available on our website immediately after they are electronically filed with or furnished to the Securities and Exchange Commission, or SEC. Such reports are also available on the SEC's website at www.sec.gov. Lending Activities General Our loan portfolio is comprised primarily of mortgage loans, most of which are secured by one-to-four family properties and, to a lesser extent, multi-family properties and commercial real estate. The remainder of the loan portfolio consists of a variety of construction and consumer and other loans. At December 31, 2005, our net loan portfolio totaled $14.31 billion, or 63.9% of total assets. We originate mortgage loans either directly through our banking and loan production offices in the New York metropolitan area or indirectly through brokers and our third party loan origination program. Mortgage loan originations and purchases totaled $4.32 billion for the year ended December 31, 2005 and $4.35 billion for the year ended December 31, 2004. Mortgage loan originations include originations of loans held-for-sale totaling $361.5 million for the year ended December 31, 2005 and $323.2 million for the year ended December 31, 2004. Our retail loan origination program accounted for $1.59 billion of originations during 2005 and $1.83 billion of originations during 2004. We also have an extensive broker network covering twenty-four states: New York, New Jersey, Connecticut, Pennsylvania, Massachusetts, Delaware, Maryland, Ohio, Virginia, North Carolina, South Carolina, Georgia, Illinois, California, Florida, Michigan, New Hampshire, Rhode Island, Missouri, Tennessee, Indiana, Kentucky, Colorado and Alabama; and the District of Columbia. Our broker loan origination program consists of relationships with mortgage brokers and accounted for $1.86 billion of originations during 2005 and $1.36 billion of originations during 2004. Our third party loan origination program includes relationships with other financial institutions and mortgage bankers covering forty-four states and the District of Columbia and accounted for purchases of $874.5 million during 2005 and $1.16 billion during 2004. Mortgage loans purchased through our third party loan origination program are subject to the same underwriting standards as our retail and broker originations. Our broker and third party loan origination programs provide efficient and diverse delivery channels for deployment of our cash flows. Additionally, they provide geographic diversification, reducing our exposure to concentrations of credit risk. At December 31, 2005, $8.06 billion, or 58.4%, of our total mortgage loan portfolio was secured by properties located in 43 states, other than New York, and the District of Columbia. We have a concentration of greater than 5.0% of our total mortgage loan portfolio in six states: 41.6% in New York, 12.5% in New Jersey, 8.9% in Connecticut, 6.6% in Virginia, 6.4% in Illinois and 5.5% in Maryland. See the "Loan Portfolio Composition" table on page 7 and the "Loan Maturity, Repricing and Activity" tables on pages 8 and 9. Effective December 1, 2005, Dovenmuehle Mortgage, Inc., or DMI, has undertaken the servicing of our mortgage loan portfolio, including our portfolio of mortgage loans serviced for other investors. For a further discussion of the outsourcing of our mortgage servicing, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," or "MD&A." One-to-Four Family Mortgage Lending Our primary lending emphasis is on the origination and purchase of first mortgage loans secured by one-to-four family properties that serve as the primary residence of the owner. To a much lesser degree, we make loans secured by non-owner occupied one-to-four family properties acquired as an investment 3 by the borrower. We also originate a limited number of second mortgage loans which are underwritten according to the same standards as first mortgage loans. At December 31, 2005, $9.76 billion, or 68.2%, of our total loan portfolio consisted of one-to-four family mortgage loans, of which $9.20 billion, or 94.3%, were adjustable rate mortgage, or ARM, loans. Our ARM loan portfolio consists primarily of hybrid and interest only ARM loans. We currently offer hybrid ARM loans which initially have a fixed rate for one, three, five, seven or ten years and convert into one year ARM loans at the end of the initial fixed rate period. The one, three, five and seven year hybrid ARM loans have terms of up to forty years and the ten year hybrid ARM loans have terms of up to thirty years. Our hybrid ARM loans require the borrower to make principal and interest payments during the entire loan term. We also offer interest only ARM loans, generally with thirty year terms, which have an initial fixed rate for three, five or seven years and convert into one year interest only ARM loans at the end of the initial fixed rate period. Interest only ARM loans require the borrower to pay interest only during the first ten years of the loan term. After the tenth anniversary of the loan, principal and interest payments are required to amortize the loan over the remaining loan term. The market for interest only ARM loans has expanded rapidly over the past several years to meet consumer mortgage demand. Our portfolio of interest only ARM loans totaled $4.97 billion, or 54.0% of our ARM loans, at December 31, 2005 and $3.13 billion, or 37.2% of our ARM loans, at December 31, 2004. We do not originate negative amortization or payment option ARM loans. All ARM loans we offer have annual and lifetime interest rate ceilings and floors. ARM loans may be offered with an initial interest rate which is less than the fully indexed rate for the loan at the time of origination. We determine the initial discounted rate in accordance with market and competitive factors. To recognize the credit risks associated with ARM loans initially offered below their fully-indexed rates, we generally underwrite our one-year ARM loans assuming a rate equal to 200 basis points over the initial discounted rate, but not less than 7.00%. For ARM loans with longer adjustment periods, and therefore less credit risk due to the longer period for the borrower's income to adjust to anticipated higher future payments, we underwrite the loans using the initial rate, which may be a discounted rate. We use the same underwriting standards for our retail, broker and third party mortgage loan originations. Our policy on owner-occupied, one-to-four family loans is to lend up to 80% of the appraised value of the property securing the loan. Generally, for mortgage loans which have a loan-to-value ratio of greater than 80%, we require the mortgagor to obtain private mortgage insurance. In addition, we offer a variety of proprietary products which allow the borrower to obtain financing of up to 90% loan-to-value without private mortgage insurance. This type of financing does not comprise a significant portion of our portfolio. ARM loans pose credit risks somewhat greater than the risks posed by fixed rate loans primarily because, as interest rates rise, the underlying payments of the borrower increase when the loan is beyond its initial fixed rate period, increasing the potential for default. Interest only ARM loans have an additional potential risk element when the loan terms are eventually recast to include principal payments and the underlying payments increase further. We continue to prudently manage the greater risk posed by ARM loans through the application of sound underwriting practices and strong risk management systems. Generally, we originate fifteen year and thirty year fixed rate one-to-four family mortgage loans for sale to various GSEs or other investors with servicing either retained or released. The sale of such loans is generally arranged through a master commitment either on a mandatory delivery or best efforts basis. Loans serviced for others totaled $1.50 billion at December 31, 2005. One-to-four family loan originations and purchases totaled $3.25 billion in 2005 and $3.20 billion in 2004. One-to-four family loan originations include originations of loans held-for-sale totaling $361.5 million in 2005 and $323.2 million in 2004. 4 Multi-Family and Commercial Real Estate Lending While we continue to primarily be a one-to-four family mortgage lender, over the past several years we have increased our emphasis on multi-family and commercial real estate loan originations. At December 31, 2005, our total loan portfolio contained $2.83 billion, or 19.8%, of multi-family mortgage loans and $1.08 billion, or 7.5%, of commercial real estate loans. During 2005, we originated $952.9 million of multi-family, commercial real estate and mixed use loans compared to $1.05 billion in 2004. Mixed use loans are secured by properties which are intended for both residential and business use and are classified as multi-family or commercial real estate based on the greater number of residential versus commercial units. The multi-family and commercial real estate loans in our portfolio consist of both fixed rate and adjustable rate loans which were originated at prevailing market rates. Multi-family and commercial real estate loans are generally five to fifteen year term balloon loans amortized over fifteen to thirty years. During 2005, we began originating interest only multi-family and commercial real estate loans to qualified borrowers. The interest only loans do not comprise a significant portion of our multi-family and commercial real estate loan portfolio at December 31, 2005. Our policy generally has been to originate multi-family and commercial real estate loans in the New York metropolitan area, although we also originate loans throughout New York State and in various other states, including New Jersey, Connecticut, Florida, Pennsylvania, Maryland, Illinois and West Virginia, and the District of Columbia. Originations in states other than New York represented 34.6% of our total originations of multi-family and commercial real estate loans in 2005, of which 85.9% were originated in New Jersey, Connecticut and Florida. We are authorized by our Board of Directors to further expand the areas in which we originate multi-family and commercial real estate loans. In making such loans, we primarily consider the ability of the net operating income generated by the real estate to support the debt service, the financial resources, income level and managerial expertise of the borrower, the marketability of the property and our lending experience with the borrower. Our current policy is to require a minimum debt service coverage ratio of 1.20 times for multi-family and commercial real estate loans. Additionally, on multi-family loans, our current policy is to finance up to 80% of the lesser of the purchase price or appraised value of the property securing the loan on purchases or 80% of the appraised value on refinances. On commercial real estate loans, our current policy is to finance up to 75% of the lesser of the purchase price or appraised value of the property securing the loans on purchases or 75% of the appraised value on refinances. The majority of the multi-family loans in our portfolio are secured by six- to fifty-unit apartment buildings and mixed use properties (more residential than business units). As of December 31, 2005, our single largest multi-family loan had an outstanding balance of $9.9 million and was current and secured by a 275-unit apartment complex in Staten Island, New York. At December 31, 2005, the average balance of loans in our multi-family portfolio was approximately $800,000. Commercial real estate loans are typically secured by retail stores, office buildings and mixed use properties (more business than residential units). As of December 31, 2005, our single largest commercial real estate loan had an outstanding principal balance of $7.5 million and was current and secured by a multi-story office building in Mineola, New York. At December 31, 2005, the average balance of loans in our commercial real estate portfolio was approximately $1.1 million. Historically, multi-family and commercial real estate loans generally involve a greater degree of credit risk than one-to-four family loans because they typically have larger balances and are more affected by adverse conditions in the economy. As such, these loans require more ongoing evaluation and monitoring. Because payments on loans secured by multi-family properties and commercial real estate often depend upon the successful operation and management of the properties and the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower's control, such as adverse conditions in the real estate market or the economy or changes in government regulation. 5 Construction Loans At December 31, 2005, $137.0 million, or 1.0%, of our total loan portfolio consisted of construction loans. We offer construction loans for all types of residential properties and certain commercial real estate properties. Generally, construction loan terms run between one and two years and are interest only, adjustable rate loans indexed to the prime rate. We generally offer construction loans up to a maximum of $10.0 million. As of December 31, 2005, our average construction loan commitment was approximately $3.2 million and the average outstanding balance of loans in our construction loan portfolio was approximately $1.7 million. Construction lending involves additional credit risk to the lender as compared with other types of mortgage lending. This additional credit risk is attributable to the fact that loan funds are advanced upon the security of the project under construction, predicated on the present value of the property and the anticipated future value of the property upon completion of construction or development. Construction loans are funded monthly, based on the work completed, and are generally monitored by a professional construction engineer and our commercial real estate lending department. To a lesser extent, qualified bank appraisers and certified home inspectors are utilized to monitor less complex projects. Consumer and Other Loans At December 31, 2005, $502.5 million, or 3.5%, of our total loan portfolio consisted of consumer and other loans which were primarily home equity lines of credit. We also offer overdraft protection, lines of credit, commercial loans, passbook loans and student loans. Consumer and other loans, with the exception of home equity and commercial lines of credit, are offered primarily on a fixed rate, short-term basis. The underwriting standards we employ for consumer and other loans include a determination of the borrower's payment history on other debts and an assessment of the borrower's ability to make payments on the proposed loan and other indebtedness. In addition to the creditworthiness of the borrower, the underwriting process also includes a review of the value of the collateral, if any, in relation to the proposed loan amount. Our consumer and other loans tend to have higher interest rates, shorter maturities and are considered to entail a greater risk of default than one-to-four family mortgage loans. Our home equity lines of credit are originated on one-to-four family owner-occupied properties. These lines of credit are generally limited to aggregate outstanding indebtedness secured by up to 90% of the appraised value of the property. Such lines of credit are underwritten based on our evaluation of the borrower's ability to repay the debt. Home equity lines of credit are adjustable rate loans which are indexed to the prime rate and generally reset monthly. Included in consumer and other loans were $24.6 million of commercial business loans at December 31, 2005. These loans are underwritten based upon the earnings of the borrower and the value of the collateral securing such loans, if any. Loan Approval Procedures and Authority Except for individual loans in excess of $15.0 million or when the overall lending relationship exceeds $60.0 million (unless the Board of Directors has set a higher limit with respect to a particular borrower), mortgage loan approval authority has been delegated by the Board of Directors to our underwriters and Loan Committee, which consists of certain members of executive management and other Astoria Federal officers. For loans between $10.0 million and $15.0 million, the approval of two non-officer directors is also required. For mortgage loans secured by one-to-four family properties, upon receipt of a completed application from a prospective borrower, we generally order a credit report, verify income and other information and, if necessary, obtain additional financial or credit related information. For mortgage loans secured by multi-family properties and commercial real estate, we obtain financial information concerning the operation of the property. Personal guarantees are generally not obtained with respect to such loans. An appraisal of the real estate used as collateral for mortgage loans is also obtained as part of the 6 underwriting process. All appraisals are performed by licensed or certified appraisers, the majority of which are licensed independent third party appraisers. We have an internal appraisal review process to monitor third party appraisals. The Board of Directors annually reviews and approves our appraisal policy. We also offer several other one-to-four family mortgage loan application alternatives. We offer stated income, full asset, or SIFA, loans; stated income, stated asset, or SISA, loans; and Super Streamline loans, which were introduced in 2005. SIFA and SISA loans require a prospective borrower to complete a standard mortgage loan application while the Super Streamline product requires the completion of an abbreviated application and is in effect considered a "no documentation" loan. Each of these products requires the receipt of an appraisal of the real estate used as collateral for the mortgage loan and a credit report on the prospective borrower. The loans are priced according to our internal risk assessment of the loan giving consideration to the loan-to-value ratio, the potential borrower's credit scores and various other credit criteria. SIFA loans require the verification of a potential borrower's asset information on the loan application, but not the income information provided. SIFA loans comprised approximately 30% of our one-to-four family loan originations in 2005 and had an average loan-to-value ratio at origination of 61.6%. The SISA and Super Streamline loans were not a significant portion of our 2005 originations. Loan Portfolio Composition The following table sets forth the composition of our loans receivable portfolio in dollar amounts and in percentages of the portfolio at the dates indicated.
At December 31, -------------------------------------------------------------------------- 2005 2004 2003 -------------------------------------------------------------------------- Percent Percent Percent of of of (Dollars in Thousands) Amount Total Amount Total Amount Total - -------------------------------------------------------------------------------------------------------------- Mortgage loans (gross): One-to-four family $ 9,757,920 68.24% $ 9,054,747 68.68% $ 8,971,048 71.13% Multi-family 2,826,807 19.77 2,558,935 19.41 2,230,414 17.69 Commercial real estate 1,075,914 7.52 944,859 7.17 880,296 6.98 Construction 137,012 0.96 117,766 0.89 99,046 0.79 - -------------------------------------------------------------------------------------------------------------- Total mortgage loans 13,797,653 96.49 12,676,307 96.15 12,180,804 96.59 - -------------------------------------------------------------------------------------------------------------- Consumer and other loans (gross): Home equity 460,064 3.22 466,087 3.53 386,846 3.07 Commercial 24,644 0.17 21,819 0.17 21,937 0.17 Lines of credit, overdraft 10,680 0.07 11,835 0.09 12,963 0.10 Other 7,116 0.05 7,547 0.06 8,400 0.07 - -------------------------------------------------------------------------------------------------------------- Total consumer and other loans 502,504 3.51 507,288 3.85 430,146 3.41 - -------------------------------------------------------------------------------------------------------------- Total loans (gross) 14,300,157 100.00% 13,183,595 100.00% 12,610,950 100.00% Net unamortized premiums and deferred loan costs 92,136 79,684 76,037 - -------------------------------------------------------------------------------------------------------------- Total loans 14,392,293 13,263,279 12,686,987 Allowance for loan losses (81,159) (82,758) (83,121) - -------------------------------------------------------------------------------------------------------------- Total loans, net $14,311,134 $13,180,521 $12,603,866 ============================================================================================================== At December 31, ------------------------------------------------- 2002 2001 ------------------------------------------------- Percent Percent of of (Dollars in Thousands) Amount Total Amount Total - ------------------------------------------------------------------------------------- Mortgage loans (gross): One-to-four family $ 9,209,360 76.86% $10,105,063 83.59% Multi-family 1,599,985 13.35 1,094,312 9.05 Commercial real estate 744,623 6.21 598,334 4.95 Construction 56,475 0.47 50,739 0.42 - ------------------------------------------------------------------------------------- Total mortgage loans 11,610,443 96.89 11,848,448 98.01 - ------------------------------------------------------------------------------------- Consumer and other loans (gross): Home equity 323,494 2.70 189,259 1.57 Commercial 22,569 0.19 18,124 0.15 Lines of credit, overdraft 15,475 0.13 18,046 0.15 Other 11,100 0.09 14,765 0.12 - ------------------------------------------------------------------------------------- Total consumer and other loans 372,638 3.11 240,194 1.99 - ------------------------------------------------------------------------------------- Total loans (gross) 11,983,081 100.00% 12,088,642 100.00% Net unamortized premiums and deferred loan costs 76,280 78,619 - ------------------------------------------------------------------------------------- Total loans 12,059,361 12,167,261 Allowance for loan losses (83,546) (82,285) - ------------------------------------------------------------------------------------- Total loans, net $11,975,815 $12,084,976 =====================================================================================
7 Loan Maturity, Repricing and Activity The following table shows the contractual maturities of our loans receivable at December 31, 2005 and does not reflect the effect of prepayments or scheduled principal amortization.
At December 31, 2005 ------------------------------------------------------------------------------------ One-to- Consumer Four Multi- Commercial and Total Loans (In Thousands) Family Family Real Estate Construction Other Receivable - --------------------------------------------------------------------------------------------------------------------- Amount due: Within one year $ 5,984 $ 1,890 $ 724 $ 80,881 $ 22,788 $ 112,267 After one year: One to three years 15,708 16,684 13,244 51,523 13,022 110,181 Three to five years 39,692 23,888 17,760 4,608 6,163 92,111 Five to ten years 376,940 1,300,887 605,438 - 9,683 2,292,948 Ten to twenty years 339,769 1,170,588 407,033 - 8,953 1,926,343 Over twenty years 8,979,827 312,870 31,715 - 441,895 9,766,307 - --------------------------------------------------------------------------------------------------------------------- Total due after one year 9,751,936 2,824,917 1,075,190 56,131 479,716 14,187,890 - --------------------------------------------------------------------------------------------------------------------- Total amount due $9,757,920 $ 2,826,807 $ 1,075,914 $ 137,012 $502,504 $14,300,157 Net unamortized premiums and deferred loan costs 92,136 Allowance for loan losses (81,159) - --------------------------------------------------------------------------------------------------------------------- Loans receivable, net $14,311,134 =====================================================================================================================
The following table sets forth at December 31, 2005, the dollar amount of our loans receivable contractually maturing after December 31, 2006, and whether such loans have fixed interest rates or adjustable interest rates. Our hybrid and interest only ARM loans are classified as adjustable rate loans. Maturing After December 31, 2006 ------------------------------------------------ (In Thousands) Fixed Adjustable Total - ---------------------------------------------------------------------------- Mortgage loans: One-to-four family $ 550,483 $ 9,201,453 $ 9,751,936 Multi-family 388,770 2,436,147 2,824,917 Commercial real estate 124,221 950,969 1,075,190 Construction - 56,131 56,131 Consumer and other loans 13,917 465,799 479,716 - ---------------------------------------------------------------------------- Total $ 1,077,391 $ 13,110,499 $ 14,187,890 ============================================================================ 8 The following table sets forth our loan originations, purchases, sales and principal repayments for the periods indicated, including loans held-for-sale.
For the Year Ended December 31, --------------------------------------------- (In Thousands) 2005 2004 2003 - -------------------------------------------------------------------------------------------- Mortgage loans (gross) (1): At beginning of year $12,698,725 $12,202,231 $11,671,567 Mortgage loans originated: One-to-four family 2,380,388 2,043,538 4,036,573 Multi-family 683,643 798,120 1,231,944 Commercial real estate 269,269 256,183 418,107 Construction 114,507 91,704 64,300 - -------------------------------------------------------------------------------------------- Total mortgage loans originated 3,447,807 3,189,545 5,750,924 - -------------------------------------------------------------------------------------------- Purchases of mortgage loans (2) 874,529 1,160,118 1,536,139 Principal repayments (2,820,437) (3,517,383) (6,126,919) Sales of mortgage loans (361,579) (322,079) (645,908) Originations (in excess of) less than advances on construction loans (15,285) (12,189) 18,519 Transfer of loans to real estate owned (2,107) (1,365) (2,028) Net loans charged off (1,225) (153) (63) - -------------------------------------------------------------------------------------------- At end of year $13,820,428 $12,698,725 $12,202,231 ============================================================================================ Consumer and other loans (gross) (3): At beginning of year $ 508,691 $ 431,792 $ 374,183 Consumer and other loans originated 295,495 333,393 286,238 Principal repayments (297,843) (253,156) (225,113) Sales of consumer and other loans (2,458) (3,128) (3,154) Net loans charged off (374) (210) (362) - -------------------------------------------------------------------------------------------- At end of year $ 503,511 $ 508,691 $ 431,792 ============================================================================================
(1) Includes loans classified as held-for-sale totaling $22.8 million, $22.4 million and $21.4 million at December 31, 2005, 2004 and 2003, respectively. (2) Purchases of mortgage loans represent third party loan originations and are predominantly secured by one-to-four family properties. (3) Includes loans classified as held-for-sale totaling $1.0 million, $1.4 million and $1.6 million at December 31, 2005, 2004 and 2003, respectively. Asset Quality General One of our key operating objectives has been and continues to be to maintain a high level of asset quality. Our concentration on one-to-four family mortgage lending, the maintenance of sound credit standards for new loan originations and a strong real estate market have resulted in our maintaining a low level of non-performing assets relative to the size of our loan portfolio. Through a variety of strategies, including, but not limited to, aggressive collection efforts and marketing of foreclosed properties, we have been proactive in addressing problem and non-performing assets which, in turn, has helped to strengthen our financial condition. The underlying credit quality of our loan portfolio is dependent primarily on each borrower's ability to continue to make required loan payments and, in the event a borrower is unable to continue to do so, the value of the collateral securing the loan, if any. A borrower's ability to pay typically is dependent, in the case of one-to-four family mortgage loans and consumer loans, primarily on employment and other sources of income, and in the case of multi-family and commercial real estate loans, on the cash flow generated by the property, which in turn is impacted by general economic conditions. Other factors, such as unanticipated expenditures or changes in the financial markets, may also impact a borrower's ability to pay. Collateral values, particularly real estate values, are also impacted by a variety of factors including general economic conditions, demographics, maintenance and collection or foreclosure delays. 9 Non-performing Assets Non-performing assets include non-accrual loans, mortgage loans delinquent 90 days or more and still accruing interest and real estate owned, or REO. Total non-performing assets increased to $66.1 million at December 31, 2005, from $33.5 million at December 31, 2004. Non-performing loans, the most significant component of non-performing assets, increased $32.4 million to $65.0 million at December 31, 2005, from $32.6 million at December 31, 2004. These increases were primarily due to increases in non-performing multi-family and one-to-four family mortgage loans. The increase in non-performing multi-family mortgage loans is primarily attributable to two large loans to unrelated borrowers. The first is a $5.4 million loan involving fraud. We have notified the applicable title insurance company of the existence of this fraud. They are defending our interest subject to a reservation of rights. The second is a $5.3 million loan where the borrower has become delinquent as a result of a large increase in his real estate taxes. The increase in non-performing one-to-four family mortgage loans is partially the result of an $11.5 million increase in loans which are classified as non-performing although they have only missed two payments, as discussed further below. At December 31, 2005, non-performing multi-family loans totaled $26.3 million and had an average loan-to-value ratio of 69.1% and an average debt service coverage ratio of 1.77 times. At December 31, 2005, non-performing one-to-four family mortgage loans totaled $35.7 million and had an average loan-to-value ratio of 64.9%. Loan-to-value ratios are based on current principal balance and original appraised value. While our non-performing loans at December 31, 2005 have increased from December 31, 2004, our non-performing loans continue to remain at low levels in relation to the size of our loan portfolio. The ratio of non-performing loans to total loans increased to 0.45% at December 31, 2005, from 0.25% at December 31, 2004. Our ratio of non-performing assets to total assets increased to 0.30% at December 31, 2005, from 0.14% at December 31, 2004. The allowance for loan losses as a percentage of total non-performing loans decreased to 124.81% at December 31, 2005, from 254.02% at December 31, 2004. For a further discussion of the allowance for loan losses and non-performing assets and loans, see Item 7, "MD&A." We discontinue accruing interest on mortgage loans when such loans become 90 days delinquent as to their interest due, even though in some instances the borrower has only missed two payments. As of December 31, 2005, $28.1 million of mortgage loans classified as non-performing had missed only two payments, compared to $12.3 million at December 31, 2004. We discontinue accruing interest on consumer and other loans when such loans become 90 days delinquent as to their payment due. In addition, we reverse all previously accrued and uncollected interest through a charge to interest income. While loans are in non-accrual status, interest due is monitored and income is recognized only to the extent cash is received until a return to accrual status is warranted. In some circumstances, we continue to accrue interest on mortgage loans delinquent 90 days or more as to their maturity date, but not their interest due. In general, 90 days prior to a loan's maturity, the borrower is reminded of the maturity date. Where the borrower has continued to make monthly payments to us and where we do not have a reason to believe that any loss will be incurred on the loan, we have treated these loans as current and have continued to accrue interest. Such loans totaled $176,000 at December 31, 2005 and $573,000 at December 31, 2004. The net carrying value of our REO totaled $1.1 million at December 31, 2005 and $920,000 at December 31, 2004 and consisted of one-to-four family properties. REO is carried net of allowances for losses at the lower of cost or fair value less estimated selling costs. Classified Assets Our Asset Review Department reviews and classifies our assets and independently reports the results of its reviews to our Board of Directors quarterly. Our Asset Classification Committee establishes policy relating to the internal classification of loans and also provides input to the Asset Review Department in its review of our assets. Federal regulations and our policy require the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as special mention, substandard, doubtful or loss. An asset classified as special mention has potential weaknesses, which, if uncorrected, may result in the deterioration of the repayment prospects or in our credit position at some future date. An asset classified 10 as substandard is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses present make collection or liquidation in full satisfaction of the loan amount, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Those assets classified as substandard, doubtful or loss are considered adversely classified. See the table on page 64 for additional information on our classified assets. If a loan is classified, an estimated value of the property securing the loan, if any, is determined through an appraisal, where possible. In instances where we have not taken possession of the property or do not otherwise have access to the premises and, therefore, cannot obtain a complete appraisal, a real estate broker's opinion as to the value of the property is obtained based primarily on a drive-by inspection and a comparison of the property securing the loan with similar properties in the area. In circumstances for which we have determined that repayment of the loan will be based solely on the collateral and the unpaid balance of the loan is greater than the estimated fair value of such collateral, a specific valuation allowance is established for the difference between the carrying value and the fair value less estimated selling costs. Impaired Loans A loan is normally deemed impaired when it is probable we will be unable to collect both principal and interest due according to the contractual terms of the loan agreement. A valuation allowance is established when the fair value of the property that collateralizes the impaired loan, if any, is less than the recorded investment in the loan. Our impaired loans at December 31, 2005, net of their related allowance for loan losses of $6.9 million, totaled $31.5 million. Interest income recognized on impaired loans amounted to $1.3 million for the year ended December 31, 2005. For further detail on our impaired loans, see Note 4 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." Allowance for Loan Losses For a discussion of our accounting policy related to the allowance for loan losses, see "Critical Accounting Policies" in Item 7, "MD&A." In addition to the requirements of U.S. generally accepted accounting principles, or GAAP, related to loss contingencies, a federally chartered savings association's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Office of Thrift Supervision, or OTS. The OTS, in conjunction with the other federal banking agencies, provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of valuation allowances. It is required that all institutions have effective systems and controls to identify, monitor and address asset quality problems, analyze all significant factors that affect the collectibility of the portfolio in a reasonable manner and establish acceptable allowance evaluation processes that meet the objectives of the federal regulatory agencies. While we believe that the allowance for loan losses has been established and maintained at adequate levels, future adjustments may be necessary if economic or other conditions differ substantially from the conditions used in making the initial determinations. In addition, there can be no assurance that the OTS or other regulators, as a result of reviewing our loan portfolio and/or allowance, will not request that we alter our allowance for loan losses, thereby affecting our financial condition and earnings. 11 Investment Activities General Our investment policy is designed to complement our lending activities, generate a favorable return without incurring undue interest rate and credit risk, enable us to manage the interest rate sensitivity of our overall assets and liabilities and provide and maintain liquidity, primarily through cash flow. In establishing our investment strategies, we consider our business and growth plans, the economic environment, our interest rate sensitivity position, the types of securities held and other factors. At December 31, 2005, our securities portfolio totaled $6.57 billion, or 29.4% of total assets. Federally chartered savings associations have authority to invest in various types of assets, including U.S. Treasury obligations; securities of government agencies and GSEs; mortgage-backed securities, including collateralized mortgage obligations, or CMOs, and real estate mortgage investment conduits, or REMICs; certain certificates of deposit of insured banks and federally chartered savings associations; certain bankers acceptances; and, subject to certain limits, corporate securities, commercial paper and mutual funds. Our investment policy also permits us to invest in certain derivative financial instruments. We do not use derivatives for trading purposes. See Note 1 and Note 10 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data," for further discussion of such derivative financial instruments. Securities Our securities portfolio is comprised primarily of mortgage-backed securities. At December 31, 2005, our mortgage-backed securities totaled $6.43 billion, or 97.8% of total securities, of which $6.33 billion, or 96.3% of total securities, were REMIC and CMO securities, substantially all of which had fixed rates. These securities provide liquidity, collateral for borrowings and minimal credit risk while providing appropriate returns and are an attractive alternative to other investments due to the wide variety of maturity and repayment options available. Of the REMIC and CMO securities portfolio, $5.91 billion, or 93.5%, are guaranteed by Fannie Mae, or FNMA, Freddie Mac, or FHLMC, or Ginnie Mae, or GNMA, as issuer. The balance of this portfolio is comprised of privately issued securities, substantially all of which have a credit rating of AAA. In addition to our REMIC and CMO securities, at December 31, 2005, we had $98.9 million, or 1.5% of total securities, in mortgage-backed pass-through certificates guaranteed by either FNMA, FHLMC or GNMA. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees or credit enhancements that reduce credit risk. However, mortgage-backed securities are more liquid than individual mortgage loans and more easily used to collateralize our borrowings. In general, our mortgage-backed securities are weighted at no more than 20% for OTS risk-based capital purposes, compared to the 50% risk weighting assigned to most non-securitized one-to-four family mortgage loans. While mortgage-backed securities carry a reduced credit risk as compared to whole loans, they, along with whole loans, remain subject to the risk of a fluctuating interest rate environment. Changes in interest rates affect both the prepayment rate and estimated fair value of mortgage-backed securities and mortgage loans. In addition to mortgage-backed securities, we have $147.2 million of other securities which consist of FNMA and FHLMC preferred stock, obligations of states and political subdivisions and corporate debt and other securities, some of which, by their terms, may be called by the issuer, typically after the passage of a fixed period of time. As of December 31, 2005, the amortized cost of callable securities totaled $124.1 million. No securities were called during the year ended December 31, 2005. At December 31, 2005, our securities available-for-sale totaled $1.84 billion and our securities held-to-maturity totaled $4.73 billion. For a further discussion of our securities portfolio, see the tables on pages 13 and 14, Item 7, "MD&A," and Note 1 and Note 3 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." 12 As a member of the Federal Home Loan Bank, or FHLB, of New York, or FHLB-NY, Astoria Federal is required to maintain a specified investment in the capital stock of the FHLB-NY. See "Regulation and Supervision - Federal Home Loan Bank System." Repurchase Agreements We invest in various money market instruments, including repurchase agreements (securities purchased under agreements to resell) and overnight and term federal funds, although at December 31, 2005 and 2004 we had no investments in federal funds sold. Money market instruments are used to invest our available funds resulting from cash flow and to help satisfy liquidity needs. For a further discussion of our repurchase agreements, see Item 7, "MD&A" and Note 1 and Note 2 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." Securities Portfolio The following table sets forth the composition of our available-for-sale and held-to-maturity securities portfolios at their respective carrying values in dollar amounts and in percentages of the portfolios at the dates indicated. Our available-for-sale securities portfolio is carried at estimated fair value and our held-to-maturity securities portfolio is carried at amortized cost.
At December 31, ------------------------------------------------------------------------ 2005 2004 2003 ------------------------------------------------------------------------ Percent Percent Percent (Dollars in Thousands) Amount of Total Amount of Total Amount of Total - -------------------------------------------------------------------------------------------------------------------------- Securities available-for-sale: Mortgage-backed securities: REMICs and CMOs: GSE issuance $ 1,567,312 85.12% $ 2,077,902 86.33% $ 2,227,851 83.90% Non-GSE issuance 57,938 3.15 75,715 3.15 103,740 3.91 GSE pass-through certificates 93,124 5.06 126,570 5.26 166,724 6.28 FNMA and FHLMC preferred stock 120,495 6.54 123,548 5.13 131,361 4.95 Other securities 2,482 0.13 3,148 0.13 25,316 0.96 - -------------------------------------------------------------------------------------------------------------------------- Total securities available-for-sale $ 1,841,351 100.00% $ 2,406,883 100.00% $ 2,654,992 100.00% ========================================================================================================================== Securities held-to-maturity: Mortgage-backed securities: REMICs and CMOs: GSE issuance $ 4,346,631 91.88% $ 5,772,676 91.58% $ 4,958,633 85.60% Non-GSE issuance 354,395 7.49 480,053 7.62 772,728 13.34 GSE pass-through certificates 5,737 0.12 9,154 0.15 14,345 0.25 Obligations of states and political subdivisions and corporate debt securities 24,190 0.51 41,053 0.65 47,021 0.81 - -------------------------------------------------------------------------------------------------------------------------- Total securities held-to-maturity $ 4,730,953 100.00% $ 6,302,936 100.00% $ 5,792,727 100.00% ==========================================================================================================================
The following table sets forth the aggregate amortized cost and estimated fair value of our securities, substantially all of which are mortgage-backed securities, where the aggregate amortized cost of securities from a single issuer exceeds ten percent of our stockholders' equity at December 31, 2005. Amortized Estimated (In Thousands) Cost Fair Value -------------------------------------------------------------------------- FHLMC $3,814,508 $ 3,720,479 FNMA 2,189,651 2,113,636 FHLB-NY (1) 145,749 145,738 - ---------- (1) Comprised primarily of FHLB-NY stock. 13 The table below sets forth certain information regarding the amortized costs, estimated fair values, weighted average yields and contractual maturities of our repurchase agreements, FHLB-NY stock and securities available-for-sale and held-to-maturity portfolios at December 31, 2005 and does not reflect the effect of prepayments or scheduled principal amortization on our REMICs, CMOs and pass-through certificates.
Within One to Five to One Year Five Years Ten Years -------------------- -------------------- -------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average (Dollars in Thousands) Cost Yield Cost Yield Cost Yield - -------------------------------------------------------------------------------------------------------------------- Repurchase agreements $ 182,803 4.10% $ - -% $ - -% ==================================================================================================================== FHLB-NY stock (1)(2) $ - -% $ - -% $ - -% ==================================================================================================================== Securities available-for-sale: REMICs and CMOs: GSE issuance $ - -% $ 173 6.55% $ - -% Non-GSE issuance - - - - - - GSE pass-through certificates 20 6.83 277 6.48 14,007 6.87 FNMA and FHLMC preferred stock (1) - - - - - - Other securities 1,753 5.09 750 3.85 - - - -------------------------------------------------------------------------------------------------------------------- Total securities available-for-sale $ 1,773 5.11% $ 1,200 4.85% $ 14,007 6.87% ==================================================================================================================== Securities held-to-maturity: REMICs and CMOs: GSE issuance $ - -% $ - -% $ - -% Non-GSE issuance - - - - - - GSE pass-through certificates 6 9.22 996 8.47 1,921 6.55 Obligations of states and political subdivisions and corporate debt securities - - 9,992 5.80 - - - -------------------------------------------------------------------------------------------------------------------- Total securities held-to-maturity $ 6 9.22% $ 10,988 6.04% $ 1,921 6.55% ==================================================================================================================== Over Ten Years Total Securities ---------------------- ------------------------------------- Weighted Estimated Weighted Amortized Average Amortized Fair Average (Dollars in Thousands) Cost Yield Cost Value Yield - --------------------------------------------------------------------------------------------------------------- Repurchase agreements $ - -% $ 182,803 $ 182,803 4.10% =============================================================================================================== FHLB-NY stock (1)(2) $ 145,247 5.25% $ 145,247 $ 145,247 5.25% =============================================================================================================== Securities available-for-sale: REMICs and CMOs: GSE issuance $ 1,645,788 3.96% $ 1,645,961 $ 1,567,312 3.96% Non-GSE issuance 61,735 3.54 61,735 57,938 3.54 GSE pass-through certificates 76,907 5.66 91,211 93,124 5.85 FNMA and FHLMC preferred stock (1) 123,495 5.47 123,495 120,495 5.47 Other securities - - 2,503 2,482 4.72 - --------------------------------------------------------------------------------------------------------------- Total securities available-for-sale $ 1,907,925 4.11% $ 1,924,905 $ 1,841,351 4.13% =============================================================================================================== Securities held-to-maturity: REMICs and CMOs: GSE issuance $ 4,346,631 4.49% $ 4,346,631 $ 4,250,726 4.49% Non-GSE issuance 354,395 4.45 354,395 346,099 4.45 GSE pass-through certificates 2,814 8.25 5,737 5,926 7.72 Obligations of states and political subdivisions and corporate debt securities 14,198 6.56 24,190 24,262 6.24 - --------------------------------------------------------------------------------------------------------------- Total securities held-to-maturity $ 4,718,038 4.50% $ 4,730,953 $ 4,627,013 4.50% ===============================================================================================================
(1) As equity securities have no maturities, they are classified in the over ten years category. (2) The carrying amount of FHLB-NY stock equals cost. 14 Sources of Funds General Our primary source of funds is the cash flow provided by our investing activities, including principal and interest payments on loans and securities. Our other sources of funds are provided by operating activities (primarily net income) and financing activities, including deposits and borrowings. Deposits We offer a variety of deposit accounts with a range of interest rates and terms. We presently offer passbook and statement savings accounts, money market accounts, NOW and demand deposit accounts, Liquid certificates of deposit, or Liquid CDs, and certificates of deposit, which include all time deposits other than Liquid CDs. Liquid CDs were introduced in January 2005 and have maturities of three months, require the maintenance of a minimum balance and allow depositors the ability to make periodic deposits to and withdrawals from their account. We consider Liquid CDs as part of our core deposits, along with savings accounts, money market accounts and NOW and demand deposit accounts, due to their depositor flexibility. At December 31, 2005, our deposits totaled $12.81 billion. Of the total deposit balance, $1.52 billion, or 11.8%, represent Individual Retirement Accounts. We held no brokered deposits at December 31, 2005. The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates, pricing of deposits and competition. Our deposits are primarily obtained from areas surrounding our banking offices. We rely primarily on our sales and marketing efforts, including print advertising, competitive rates, quality service, our PEAK Process, new products and long-standing customer relationships to attract and retain these deposits. When we determine the levels of our deposit rates, consideration is given to local competition, yields of U.S. Treasury securities and the rates charged for other sources of funds. We continue to experience intense competition for deposits. However, we continue to maintain a strong level of core deposits, which has contributed to our low cost of funds. Core deposits represented 41.8% of total deposits at December 31, 2005. For a further discussion of our deposits, see the tables below and on page 16, Item 7, "MD&A," and Note 7 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." The following table presents our deposit activity for the years indicated. For the Year Ended December 31, ----------------------------------------------- (Dollars in Thousands) 2005 2004 2003 - -------------------------------------------------------------------------------- Opening balance $ 12,323,257 $ 11,186,594 $ 11,067,196 Net deposits (withdrawals) 205,799 899,234 (105,853) Interest credited 281,399 237,429 225,251 - -------------------------------------------------------------------------------- Ending balance $ 12,810,455 $ 12,323,257 $ 11,186,594 ================================================================================ Net increase $ 487,198 $ 1,136,663 $ 119,398 ================================================================================ Percentage increase 3.95% 10.16% 1.08% ================================================================================ The following table sets forth the maturity periods of our certificates of deposit and Liquid CDs in amounts of $100,000 or more at December 31, 2005. (In Thousands) Amount ----------------------------------------------------------------------- Within three months $ 724,000 Three to six months 462,122 Six to twelve months 403,488 Over twelve months 725,141 ----------------------------------------------------------------------- Total $ 2,314,751 ======================================================================= 15 The following table sets forth the distribution of our average deposit balances for the periods indicated and the weighted average nominal interest rates for each category of deposit presented.
For the Year Ended December 31, ------------------------------------------------------------------------------------------------- 2005 2004 2003 ------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Average Percent Nominal Average Percent Nominal Average Percent Nominal (Dollars in Thousands) Balance of Total Rate Balance of Total Rate Balance of Total Rate - ------------------------------------------------------------------------------------------------------------------------------- Savings $ 2,742,417 21.74% 0.40% $ 2,973,054 25.18% 0.40% $ 2,907,541 25.96% 0.45% Money market 804,855 6.38 0.93 1,088,915 9.22 0.58 1,403,363 12.53 0.71 NOW 936,848 7.43 0.10 927,632 7.86 0.10 851,723 7.60 0.18 Non-interest bearing NOW and demand deposit 632,571 5.01 - 607,190 5.14 - 618,082 5.52 - Liquid CDs 350,923 2.78 3.01 - - - - - - - ------------------------------------------------------------------------------------------------------------------------------- Total 5,467,614 43.34 0.55 5,596,791 47.40 0.34 5,780,709 51.61 0.43 - ------------------------------------------------------------------------------------------------------------------------------- Certificates of deposit (1): Within one year 809,136 6.41 2.35 955,919 8.10 1.26 1,424,825 12.72 1.55 One to three years 3,191,691 25.32 2.98 2,340,879 19.82 2.80 1,688,220 15.07 3.51 Three to five years 2,760,364 21.88 4.32 2,645,262 22.40 4.82 2,071,864 18.51 5.22 Over five years 54,856 0.43 4.53 126,132 1.07 4.95 86,749 0.77 4.95 Jumbo 330,617 2.62 3.25 142,822 1.21 1.65 148,067 1.32 1.74 - ------------------------------------------------------------------------------------------------------------------------------- Total 7,146,664 56.66 3.45 6,211,014 52.60 3.44 5,419,725 48.39 3.62 - ------------------------------------------------------------------------------------------------------------------------------- Total deposits $12,614,278 100.00% 2.19% $11,807,805 100.00% 1.97% $11,200,434 100.00% 1.97% ===============================================================================================================================
(1) Terms indicated are original, not term remaining to maturity. The following table presents, by rate categories, the remaining periods to maturity of our certificates of deposit and Liquid CDs outstanding at December 31, 2005 and the balances of our certificates of deposit and Liquid CDs outstanding at December 31, 2005, 2004 and 2003.
Period to maturity from December 31, 2005 At December 31, ----------------------------------------------------- ---------------------------------------- Within One to two Two to three Over three (In Thousands) one year years years years 2005 2004 2003 - ----------------------------------------------------------------------------------- ---------------------------------------- Certificates of deposit and Liquid CDs: 1.99% or less $ 295,831 $ 6,965 $ - $ - $ 302,796 $ 982,159 $ 1,446,137 2.00% to 2.99% 1,169,390 127,240 5,757 2,949 1,305,336 2,204,981 797,506 3.00% to 3.99% 2,644,568 929,932 441,300 61,148 4,076,948 1,901,075 1,268,117 4.00% to 4.99% 494,997 263,409 472,787 579,664 1,810,857 699,936 611,975 5.00% to 5.99% 235,682 302,102 - 313 538,097 589,044 678,556 6.00% and over 46,935 - - - 46,935 470,940 699,107 - ------------------------------------------------------------------------------------------------------------------------------ Total $ 4,887,403 $ 1,629,648 $ 919,844 $ 644,074 $ 8,080,969 $ 6,848,135 $ 5,501,398 ==============================================================================================================================
Borrowings Borrowings are used as a complement to deposit generation as a funding source for asset growth and are an integral part of our interest rate risk management strategy. We enter into reverse repurchase agreements (securities sold under agreements to repurchase) with nationally recognized primary securities dealers and the FHLB-NY. Reverse repurchase agreements are accounted for as borrowings and are secured by the securities sold under the agreements. We also obtain advances from the FHLB-NY which are generally secured by a blanket lien against, among other things, our one-to-four family mortgage loan portfolio and our investment in FHLB-NY stock. The maximum amount that the FHLB-NY will advance, for purposes other than for meeting withdrawals, fluctuates from time to time in accordance with the policies of the FHLB-NY. See "Regulation and Supervision - Federal Home Loan Bank System." Occasionally, we will obtain funds through the issuance of unsecured debt obligations. These obligations are classified as other borrowings in our consolidated statement of financial condition. At December 31, 2005, borrowings totaled $7.94 billion. In addition, at December 31, 2005, we had a 12-month commitment for overnight and one month lines of credit with the FHLB-NY totaling $200.0 million, of which $40.0 million was outstanding under the 16 overnight and $50.0 million was outstanding under the one-month line of credit, which are included in total borrowings. Both lines of credit are priced at the federal funds rate plus a spread (generally between 10 and 15 basis points) and reprice daily. Included in our borrowings are various obligations which, by their terms, may be called by the securities dealers and the FHLB-NY. At December 31, 2005, we had $2.18 billion of borrowings which are callable within one year and at various times thereafter which have contractual remaining maturities of up to three years. We also have $500.0 million of borrowings, due in 2015, which are callable in 2007 and at various times thereafter. For further information regarding our borrowings, including our borrowings outstanding, average borrowings, maximum borrowings and weighted average interest rates at and for each of the years ended December 31, 2005, 2004 and 2003, see Item 7, "MD&A" and Note 8 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." Non-interest Revenue We have continued to focus on building sources of non-interest revenue, including expanding our checking account base to generate additional fees and by making mutual funds, deferred annuities and insurance products available to our customers through our wholly-owned subsidiaries. See "Subsidiary Activities." Market Area and Competition Astoria Federal has been, and continues to be, a community-oriented federally chartered savings association offering a variety of financial services to meet the needs of the communities it serves. Our retail banking network includes multiple delivery channels including full service banking offices, automated teller machines, or ATMs, and telephone and internet banking capabilities. We consider our strong retail banking network, together with our reputation for financial strength and customer service, as our major strengths in attracting and retaining customers in our market areas. Astoria Federal's deposit gathering sources are primarily concentrated in the communities surrounding Astoria Federal's banking offices in Queens, Kings (Brooklyn), Nassau, Suffolk and Westchester counties in the New York metropolitan area. At December 31, 2005, Astoria Federal ranked fourth in deposit market share, with an 8.3% market share, in the Long Island market, which includes the counties of Queens, Brooklyn, Nassau and Suffolk, based on the Federal Deposit Insurance Corporation, or FDIC, "Summary of Deposits - Market Share Report" dated June 30, 2005. Astoria Federal originates mortgage loans through its banking and loan production offices in the New York metropolitan area, through an extensive broker network covering twenty-four states and the District of Columbia and through a third party loan origination program covering forty-four states and the District of Columbia. Our broker and third party loan origination programs provide efficient and diverse delivery channels for deployment of our cash flows. Additionally, they provide geographic diversification, reducing our exposure to concentrations of credit risk. The New York metropolitan area has a high density of financial institutions, a number of which are significantly larger and have greater financial resources than we have. Additionally over the past several years, various large out-of-state financial institutions have entered the New York metropolitan area market. All are our competitors to varying degrees. Our competition for loans, both locally and in the aggregate, comes principally from mortgage banking companies, commercial banks, savings banks and savings and loan associations. We have experienced continued intense competition for deposits, particularly money market and checking accounts. Our most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. We also face intense competition for deposits from money market mutual funds and other corporate and government securities funds as well as from other financial intermediaries such as brokerage firms and insurance companies. 17 Subsidiary Activities We have two direct wholly-owned subsidiaries, Astoria Federal and AF Insurance Agency, Inc., which are reported on a consolidated basis at December 31, 2005. AF Insurance Agency, Inc. is a life insurance and property and casualty insurance agency. Through contractual agreements with various third party marketing organizations, AF Insurance Agency, Inc. makes insurance products available primarily to the customers of Astoria Federal. We have one other direct subsidiary, Astoria Capital Trust I, which is not consolidated with Astoria Financial Corporation for financial reporting purposes in accordance with FIN 46(R). Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0 million of Capital Securities and $3.9 million of common securities and using the proceeds to acquire $128.9 million of Junior Subordinated Debentures issued by us. The Junior Subordinated Debentures total $128.9 million, have an interest rate of 9.75%, mature on November 1, 2029 and are the sole assets of Astoria Capital Trust I. The Junior Subordinated Debentures are prepayable, in whole or in part, at our option on or after November 1, 2009 at declining premiums to November 1, 2019, after which the Junior Subordinated Debentures are prepayable at par value. The Capital Securities have the same prepayment provisions as the Junior Subordinated Debentures. See Note 1 and Note 8 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" for further discussion of Astoria Capital Trust I, the Capital Securities and the Junior Subordinated Debentures. At December 31, 2005, the following were wholly-owned subsidiaries of Astoria Federal and are reported on a consolidated basis: AF Agency, Inc. was formed in 1990 to make tax-deferred annuities and a variety of mutual funds available to the customers of Astoria Federal through an unaffiliated third party vendor. Astoria Federal is reimbursed for expenses and administrative services it provides to AF Agency, Inc. Fees generated by AF Agency, Inc. totaled $8.4 million for the year ended December 31, 2005, which represented 8.2% of non-interest income. Astoria Federal Savings and Loan Association Revocable Grantor Trust was formed in November 2000 in connection with the establishment of a BOLI program by Astoria Federal. Premiums paid to purchase BOLI in 2000 and 2002 totaled $350.0 million. The carrying amount of our investment in BOLI was $382.6 million, or 1.7% of total assets, at December 31, 2005. See Note 1 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" for further discussion of BOLI. Astoria Federal Mortgage Corp. is an operating subsidiary through which Astoria Federal engages in lending activities outside the State of New York. Star Preferred Holding Corporation, or Star Preferred, was incorporated in the State of New Jersey in November 1999 to function as a holding company for Astoria Preferred Funding Corporation, or APFC, which qualified as a real estate investment trust under the Internal Revenue Code of 1986, as amended. During 2005, substantially all of the mortgage loans held by APFC were transferred to Fidata Service Corp., or Fidata, a previously inactive subsidiary of Astoria Federal. The remaining assets of both APFC and Star Preferred were transferred to Astoria Federal. Star Preferred and APFC have no assets or operations at December 31, 2005 and are in the process of being dissolved. Fidata was incorporated in the State of New York in November 1982 and qualifies for alternative tax treatment under Article 9A of the New York State Tax Law. Prior to 2005, Fidata was inactive. During 2005, Fidata was reorganized to qualify as a Connecticut passive investment company, or PIC. Fidata maintains offices in Norwalk, Connecticut and invests in loans secured by real property which qualify as intangible investments permitted to be held by a Connecticut PIC. Fidata mortgage loans totaled $6.76 billion at December 31, 2005. Suffco Service Corporation, or Suffco, serves as document custodian for the loans of Astoria Federal and Fidata and certain loans being serviced for FNMA and other investors. 18 Entrust Holding Corp. is the owner of a fifty percent membership interest in Entrust Title Agency, LLC, which sells title insurance. Astoria Federal has two subsidiaries which may qualify for alternative tax treatment under Article 9A of the New York State Tax Law and therefore, although inactive, are retained by Astoria Federal. Astoria Federal has four additional subsidiaries, two of which are single purpose entities that have interests in real estate investments, which are not material to our financial condition, and one of which has no assets or operations but may be used to acquire interests in real estate in the future. The fourth such subsidiary serves as a holding company for one of the other three. Astoria Federal has three additional subsidiaries which are inactive, two of which Astoria Federal intends to dissolve. Personnel As of December 31, 2005, we had 1,545 full-time employees and 225 part-time employees, or 1,658 full time equivalents. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good. Regulation and Supervision General Astoria Federal is subject to extensive regulation, examination and supervision by the OTS, as its chartering agency, and by the FDIC, as its deposit insurer. We, as a unitary savings and loan holding company, are regulated, examined and supervised by the OTS. Astoria Federal is a member of the FHLB-NY and its deposit accounts are insured up to applicable limits by the FDIC under the Savings Association Insurance Fund, or SAIF, except for those deposits acquired from The Greater New York Savings Bank, which are insured by the FDIC under the Bank Insurance Fund, or BIF. We and Astoria Federal must file reports with the OTS concerning our activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other financial institutions. The OTS periodically performs safety and soundness examinations of Astoria Federal and us and tests our compliance with various regulatory requirements. The FDIC reserves the right to do so as well. The OTS has primary enforcement responsibility over federally chartered savings associations and has substantial discretion to impose enforcement action on an institution that fails to comply with applicable regulatory requirements, particularly with respect to its capital requirements. In addition, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular federally chartered savings association and, if action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. This regulation and supervision establishes a comprehensive framework to regulate and control the activities in which we can engage and is intended primarily for the protection of the deposit insurance funds and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the OTS, FDIC or Congress, could have a material adverse impact on Astoria Federal and us and our respective operations. The description of statutory provisions and regulations applicable to federally chartered savings associations and their holding companies and of tax matters set forth in this document does not purport to be a complete description of all such statutes and regulations and their effects on Astoria Federal and us. 19 Federally Chartered Savings Association Regulation Business Activities Astoria Federal derives its lending and investment powers from the Home Owners' Loan Act, as amended, or HOLA, and the regulations of the OTS thereunder. Under these laws and regulations, Astoria Federal may invest in mortgage loans secured by residential and non-residential real estate, commercial and consumer loans, certain types of debt securities and certain other assets. Astoria Federal may also establish service corporations that may engage in activities not otherwise permissible for Astoria Federal, including certain real estate equity investments and securities and insurance brokerage activities. These investment powers are subject to various limitations, including (1) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories, (2) a limit of 400% of an association's capital on the aggregate amount of loans secured by non-residential real estate property, (3) a limit of 20% of an association's assets on commercial loans, with the amount of commercial loans in excess of 10% of assets being limited to small business loans, (4) a limit of 35% of an association's assets on the aggregate amount of consumer loans and acquisitions of certain debt securities, (5) a limit of 5% of assets on non-conforming loans (loans in excess of the specific limitations of HOLA), and (6) a limit of the greater of 5% of assets or an association's capital on certain construction loans made for the purpose of financing what is or is expected to become residential property. Capital Requirements The OTS capital regulations require federally chartered savings associations to meet three minimum capital ratios: a 1.5% tangible capital ratio, a 4% leverage (core) capital ratio and an 8% total risk-based capital ratio. In assessing an institution's capital adequacy, the OTS takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where necessary. Astoria Federal, as a matter of prudent management, targets as its goal the maintenance of capital ratios which exceed these minimum requirements and that are consistent with Astoria Federal's risk profile. At December 31, 2005, Astoria Federal exceeded each of its capital requirements with a tangible capital ratio of 6.53%, leverage capital ratio of 6.53% and total risk-based capital ratio of 12.53%. The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, requires that the OTS and other federal banking agencies revise their risk-based capital standards, with appropriate transition rules, to ensure that they take into account interest rate risk, or IRR, concentration of risk and the risks of non-traditional activities. The OTS regulations do not include a specific IRR component of the risk-based capital requirement. However, the OTS monitors the IRR of individual institutions through a variety of means, including an analysis of the change in net portfolio value, or NPV. NPV is defined as the net present value of the expected future cash flows of an entity's assets and liabilities and, therefore, hypothetically represents the value of an institution's net worth. The OTS has also used this NPV analysis as part of its evaluation of certain applications or notices submitted by thrift institutions. In addition, OTS Thrift Bulletin 13a provides guidance on the management of IRR and the responsibility of boards of directors in that area. The OTS, through its general oversight of the safety and soundness of savings associations, retains the right to impose minimum capital requirements on individual institutions to the extent the institution is not in compliance with certain written guidelines established by the OTS regarding NPV analysis. The OTS has not imposed any such requirements on Astoria Federal. Prompt Corrective Regulatory Action FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the banking regulators are required to take certain, and authorized to take other, supervisory actions against undercapitalized institutions, based upon five categories of capitalization which FDICIA created: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized," the severity of which depends upon 20 the institution's degree of capitalization. Generally, a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." In addition, various mandatory supervisory actions become immediately applicable to the institution, including restrictions on growth of assets and other forms of expansion. Under the OTS regulations, generally, a federally chartered savings association is treated as well capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater and its leverage ratio is 5% or greater, and it is not subject to any order or directive by the OTS to meet a specific capital level. As of December 31, 2005, Astoria Federal was considered "well capitalized" by the OTS, with a total risk-based capital ratio of 12.53%, Tier 1 risk-based capital ratio of 11.86% and leverage ratio of 6.53%. Insurance of Deposit Accounts Pursuant to FDICIA, the FDIC established a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. Under the risk-based assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of its most recent quarterly financial report filed with the applicable bank regulatory agency prior to the commencement of the assessment period, consisting of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized. The FDIC also assigns an institution to one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's deposit insurance assessment rate depends on the capital category and supervisory subcategory to which it is assigned. Under the risk-based assessment system, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied, ranging from 0 to 27 basis points. The assessment rates for our BIF-assessable and SAIF-assessable deposits since 1997 were each 0 basis points. If the FDIC determines that assessment rates should be increased, institutions in all risk categories could be affected. The FDIC has exercised this authority several times in the past and could raise insurance assessment rates in the future. SAIF-assessable deposits are also subject to assessments for payments on the bonds issued in the late 1980s by the Financing Corporation, or FICO, to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. Our total expense in 2005 for the assessment for the FICO payments was $1.8 million. On February 8, 2006, President Bush signed the "Federal Deposit Insurance Reform Act of 2005," or the 2005 Deposit Act, into law. The 2005 Deposit Act contains provisions designed to reform and modernize the Federal deposit insurance system. Among other things, the 2005 Deposit Act will merge the BIF and SAIF into a new Deposit Insurance Fund; index the current $100,000 deposit insurance limit to inflation beginning in 2010 and every succeeding five years; and increase the deposit insurance limit for certain retirement accounts to $250,000 and index that limit to inflation. Loans to One Borrower Under the HOLA, savings associations are generally subject to the national bank limits on loans to one borrower. Generally, savings associations may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the institution's unimpaired capital and surplus. Additional amounts may be loaned, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are secured by readily-marketable collateral. Astoria Federal is in compliance with applicable loans to one borrower limitations. At December 31, 2005, Astoria Federal's largest aggregate amount of loans to one borrower totaled $67.1 million. All of the loans for the largest borrower were performing in accordance with their terms and the borrower had no affiliation with Astoria Federal. 21 Qualified Thrift Lender, or QTL, Test The HOLA requires savings associations to meet a QTL test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" (total assets less (1) specified liquid assets up to 20% of total assets, (2) intangibles, including goodwill, and (3) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities, credit card loans, student loans, and small business loans) on a monthly basis during at least 9 out of every 12 months. As of December 31, 2005, Astoria Federal maintained in excess of 92% of its portfolio assets in qualified thrift investments and had more than 65% of its portfolio assets in qualified thrift investments for each of the 12 months in the year ended December 31, 2005. Therefore, Astoria Federal qualified under the QTL test. A savings association that fails the QTL test and does not convert to a bank charter generally will be prohibited from: (1) engaging in any new activity not permissible for a national bank, (2) paying dividends not permissible under national bank regulations, and (3) establishing any new branch office in a location not permissible for a national bank in the association's home state. In addition, if the association does not requalify under the QTL test within three years after failing the test, the association would be prohibited from engaging in any activity not permissible for a national bank and would have to repay any outstanding advances from the FHLB as promptly as possible. Limitation on Capital Distributions The OTS regulations impose limitations upon certain capital distributions by savings associations, such as certain cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The OTS regulates all capital distributions by Astoria Federal directly or indirectly to us, including dividend payments. As the subsidiary of a savings and loan holding company, Astoria Federal currently must file a notice with the OTS at least 30 days prior to each capital distribution. However, if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years, then Astoria Federal must file an application to receive the approval of the OTS for a proposed capital distribution. Our ability to pay dividends, service our debt obligations and repurchase our common stock is dependent primarily upon receipt of dividend payments from Astoria Federal. Astoria Federal may not pay dividends to us if, after paying those dividends, it would fail to meet the required minimum levels under risk-based capital guidelines and the minimum leverage and tangible capital ratio requirements or the OTS notified Astoria Federal that it was in need of more than normal supervision. Under the Federal Deposit Insurance Act, or FDIA, an insured depository institution such as Astoria Federal is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become "undercapitalized" (as such term is used in the FDIA). Payment of dividends by Astoria Federal also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe and unsound banking practice. Liquidity Astoria Federal maintains sufficient liquidity to ensure its safe and sound operation, in accordance with OTS regulations. Assessments The OTS charges assessments to recover the costs of examining savings associations and their affiliates. These assessments are based on three components: the size of the association, on which the basic assessment is based; the association's supervisory condition, which results in an additional assessment based on a percentage of the basic assessment for any savings institution with a composite 22 rating of 3, 4 or 5 in its most recent safety and soundness examination; and the complexity of the association's operations, which results in an additional assessment based on a percentage of the basic assessment for any savings association that managed over $1.00 billion in trust assets, serviced for others loans aggregating more than $1.00 billion, or had certain off-balance sheet assets aggregating more than $1.00 billion. Effective July 1, 2004, the OTS adopted a final rule replacing examination fees for savings and loan holding companies with semi-annual assessments. The OTS has phased in the assessments at a rate of 25% of the first semi-annual assessment on July 1, 2004, 50% of the second semi-annual assessment on January 1, 2005 and 100% of the third semi-annual assessment on July 1, 2005. For the year ended December 31, 2005, we paid $2.9 million in assessments. Branching The OTS regulations authorize federally chartered savings associations to branch nationwide to the extent allowed by federal statute. This permits federal savings and loan associations with interstate networks to more easily diversify their loan portfolios and lines of business geographically. OTS authority preempts any state law purporting to regulate branching by federal savings associations. Community Reinvestment Under the Community Reinvestment Act, or CRA, as implemented by the OTS regulations, a federally chartered savings association has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income areas. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the OTS, in connection with its examination of a federally chartered savings association, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The assessment focuses on three tests: (1) a lending test, to evaluate the institution's record of making loans, including community development loans, in its designated assessment areas; (2) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and areas and small businesses; and (3) a service test, to evaluate the institution's delivery of banking services throughout its CRA assessment area, including low and moderate income areas. The CRA also requires all institutions to make public disclosure of their CRA ratings. Astoria Federal has been rated as "outstanding" over its last five CRA examinations. Regulations require that we publicly disclose certain agreements that are in fulfillment of CRA. We have no such agreements in place at this time. Transactions with Related Parties Astoria Federal is subject to the affiliate and insider transaction rules set forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, or FRA, Regulation W issued by the Federal Reserve Board, or FRB, as well as additional limitations as adopted by the Director of the OTS. OTS regulations regarding transactions with affiliates conform to Regulation W. These provisions, among other things, prohibit, limit or place restrictions upon a savings institution extending credit to, or entering into certain transactions with, its affiliates (which for Astoria Federal would include us and our non-federally chartered savings association subsidiaries, if any), principal stockholders, directors and executive officers. In addition, the OTS regulations include additional restrictions on savings associations under Section 11 of HOLA, including provisions prohibiting a savings association from making a loan to an affiliate that is engaged in non-bank holding company activities and provisions prohibiting a savings association from purchasing or investing in securities issued by an affiliate that is not a subsidiary. The OTS regulations also include certain specific exemptions from these prohibitions. The FRB and the OTS require each depository institution that is subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W and the OTS regulations regarding transactions with affiliates. Section 402 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, prohibits the extension of personal loans to directors and executive officers of issuers (as defined in Sarbanes-Oxley). The prohibition, 23 however, does not apply to mortgages advanced by an insured depository institution, such as Astoria Federal, that is subject to the insider lending restrictions of Section 22(h) of the FRA. Standards for Safety and Soundness Pursuant to the requirements of FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, the OTS, together with the other federal bank regulatory agencies, adopted guidelines establishing general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the OTS adopted regulations pursuant to FDICIA to require a savings association that is given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan to the OTS. If, after being so notified, a savings association fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing corrective actions and may issue an order directing other actions of the types to which a significantly undercapitalized institution is subject under the "prompt corrective action" provisions of FDICIA. If a savings association fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. For further discussion, see "Regulation and Supervision - Federally Chartered Savings Association Regulation - Prompt Corrective Regulatory Action." Insurance Activities Astoria Federal is generally permitted to engage in certain insurance activities through its subsidiaries. However, Astoria Federal is subject to regulations prohibiting depository institutions from conditioning the extension of credit to individuals upon either the purchase of an insurance product or annuity or an agreement by the consumer not to purchase an insurance product or annuity from an entity that is not affiliated with the depository institution. The regulations also require prior disclosure of this prohibition to potential insurance product or annuity customers. Privacy Protection Astoria Federal is subject to OTS regulations implementing the privacy protection provisions of the Gramm-Leach Bliley Act, or Gramm-Leach. These regulations require Astoria Federal to disclose its privacy policy, including identifying with whom it shares "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require Astoria Federal to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of such information is not exempted, Astoria Federal is required to provide its customers with the ability to "opt-out" of having Astoria Federal share their nonpublic personal information with unaffiliated third parties. Astoria Federal is subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of Gramm-Leach. The guidelines describe the agencies' expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. 24 Anti-Money Laundering and Customer Identification Astoria Federal is subject to OTS regulations implementing the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act. The USA PATRIOT Act gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, Title III of the USA PATRIOT Act and the related OTS regulations impose the following requirements with respect to financial institutions: o Establishment of anti-money laundering programs. o Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time. o Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering. o Prohibition on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks. In addition, bank regulators are directed to consider a holding company's effectiveness in combating money laundering when ruling on FRA and Bank Merger Act applications. Federal Home Loan Bank System Astoria Federal is a member of the FHLB System which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. Astoria Federal, as a member of the FHLB-NY, is currently required to acquire and hold shares of capital stock in the FHLB-NY. Effective December 1, 2005, the FHLB-NY implemented a new capital plan. The new capital plan resulted in an automatic exchange of shares of FHLB-NY stock held by members for shares of FHLB-NY Class B stock and changed the members' minimum stock investment requirements. The Class B stock has a par value of $100 per share and is redeemable upon five years notice, subject to certain conditions. The Class B stock has two subclasses, one for membership stock purchase requirements and the other for activity-based stock purchase requirements. The minimum stock investment requirement in the FHLB-NY Class B stock is the sum of the membership stock purchase requirement, determined on an annual basis at the end of each calendar year, and the activity-based stock purchase requirement, determined on a daily basis. For Astoria Federal, the membership stock purchase requirement is 0.2% of the Mortgage-Related Assets, as defined by the FHLB-NY, which consists principally of residential mortgage loans and mortgage-backed securities including CMOs and REMICs, held by Astoria Federal. The activity-based stock purchase requirement for Astoria Federal is equal to the sum of: (1) 4.5% of outstanding borrowings from the FHLB-NY; (2) 4.5% of the outstanding principal balance of Acquired Member Assets, as defined by the FHLB-NY, and delivery commitments for Acquired Member Assets; (3) a specified dollar amount related to certain off-balance sheet items, which for Astoria Federal is zero; and (4) a specified percentage ranging from 0 to 5% of the carrying value on the FHLB-NY's balance sheet of derivative contracts between the FHLB-NY and its members, which for Astoria Federal is also zero. The FHLB-NY can adjust the specified percentages and dollar amount from time to time within the ranges established by the FHLB-NY capital plan. Prior to December 1, 2005, Astoria Federal was required to acquire and hold shares of capital stock in the FHLB-NY in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year or 5% of its outstanding borrowings from the FHLB-NY, whichever was greater. 25 Astoria Federal was in compliance with the FHLB-NY minimum stock investment requirements with an investment in FHLB-NY stock at December 31, 2005 of $145.2 million. Dividends from the FHLB-NY to Astoria Federal amounted to $6.0 million for the year ended December 31, 2005, $3.5 million for the year ended December 31, 2004 and $10.6 million for the year ended December 31, 2003. Federal Reserve System FRB regulations require federally chartered savings associations to maintain non-interest-earning cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). A reserve of 3% is to be maintained against aggregate transaction accounts between $7.8 million and $48.3 million (subject to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the FRB between 8% and 14%) against that portion of total transaction accounts in excess of $48.3 million. The first $7.8 million of otherwise reservable balances (subject to adjustment by the FRB) is exempt from the reserve requirements. Astoria Federal is in compliance with the foregoing requirements. Since required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce Astoria Federal's interest-earning assets. FHLB System members are also authorized to borrow from the Federal Reserve "discount window," but FRB regulations require institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. Holding Company Regulation We are a unitary savings and loan association holding company within the meaning of the HOLA. As such, we are registered with the OTS and are subject to the OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over us and our savings association subsidiary. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. Gramm-Leach also restricts the powers of new unitary savings and loan association holding companies. Unitary savings and loan association holding companies that are "grandfathered," i.e., unitary savings and loan association holding companies in existence or with applications filed with the OTS on or before May 4, 1999, such as us, retain their authority under the prior law. All other unitary savings and loan association holding companies are limited to financially related activities permissible for bank holding companies, as defined under Gramm-Leach. Gramm-Leach also prohibits non-financial companies from acquiring grandfathered unitary savings and loan association holding companies. The HOLA prohibits a savings and loan association holding company (directly or indirectly, or through one or more subsidiaries) from acquiring another savings association or holding company thereof without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by holding companies to acquire savings associations, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. Federal Securities Laws We are subject to the periodic reporting, proxy solicitation, tender offer, insider trading restrictions and other requirements under the Exchange Act. Delaware Corporation Law We are incorporated under the laws of the State of Delaware. Thus, we are subject to regulation by the State of Delaware and the rights of our shareholders are governed by the Delaware General Corporation Law. 26 Federal Taxation General We report our income on a calendar year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations. Corporate Alternative Minimum Tax In addition to the regular income tax, corporations (including savings and loan associations) generally are subject to an alternative minimum tax, or AMT, in an amount equal to 20% of alternative minimum taxable income to the extent the AMT exceeds the corporation's regular tax. The AMT is available as a credit against future regular income tax. We do not expect to be subject to the AMT. Tax Bad Debt Reserves Effective 1996, federal tax legislation modified the methods by which a thrift computes its bad debt deduction. As a result, Astoria Federal is required to claim a deduction equal to its actual loss experience, and the "reserve method" is no longer available. Any cumulative reserve additions (i.e., bad debt deductions) in excess of actual loss experience for tax years 1988 through 1995 were recaptured over a six year period. Generally, reserve balances as of December 31, 1987 will only be subject to recapture upon distribution of such reserves to shareholders. For a further discussion of bad debt reserves, see "Distributions." Distributions To the extent that Astoria Federal makes "nondividend distributions" to shareholders, such distributions will be considered to result in distributions from Astoria Federal's "base year reserve," (i.e., its reserve as of December 31, 1987), to the extent thereof, and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in Astoria Federal's taxable income. Nondividend distributions include distributions in excess of Astoria Federal's current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of Astoria Federal's current or accumulated earnings and profits will not constitute nondividend distributions and, therefore, will not be included in Astoria Federal's taxable income. The amount of additional taxable income created from a nondividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the nondividend distribution would be includable in gross income for federal income tax purposes, assuming a 35% federal corporate income tax rate. Dividends Received Deduction and Other Matters We may exclude from our income 100% of dividends received from Astoria Federal as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which we will not file a consolidated tax return, except that if we own more than 20% of the stock of a corporation distributing a dividend, 80% of any dividends received may be deducted. State and Local Taxation New York State Taxation New York State imposes an annual franchise tax on banking corporations, based on net income allocable to New York State, at a rate of 7.5%. If, however, the application of an alternative minimum tax (based on taxable assets allocated to New York, "alternative" net income, or a flat minimum fee) 27 results in a greater tax, an alternative minimum tax will be imposed. In addition, New York State imposes a tax surcharge of 17.0% of the New York State Franchise Tax, calculated using an annual franchise tax rate of 9.0% (which represents the 2000 annual franchise tax rate), allocable to business activities carried on in the Metropolitan Commuter Transportation District. These taxes apply to us, Astoria Federal and certain of Astoria Federal's subsidiaries. Certain other subsidiaries are subject to a general business corporation tax in lieu of the tax on banking corporations or are subject to taxes of other jurisdictions. The rules regarding the determination of net income allocated to New York State and alternative minimum taxes differ for these subsidiaries. Bad Debt Deduction New York State passed legislation that incorporated the former provisions of Internal Revenue Code, or IRC, Section 593 into New York State tax law. The impact of this legislation enabled Astoria Federal to defer the recapture of the New York State tax bad debt reserves that would have otherwise occurred as a result of the federal amendment to IRC 593. The legislation also enabled Astoria Federal to continue to utilize the reserve method for computing its bad debt deduction. Astoria Federal must meet certain definitional tests, primarily relating to its assets and the nature of its business to be a qualifying thrift and would then be permitted to establish a reserve for bad debts and to make annual additions thereto, which additions may, within specified formula limits, be deducted in arriving at its taxable income. Astoria Federal will be a qualifying thrift if, among other requirements, at least 60% of its assets are assets described in Section 1453(h)(1) of the New York State tax law, or the 60% Test. Astoria Federal presently satisfies the 60% Test. Although there can be no assurance that Astoria Federal will satisfy the 60% Test in the future, we believe that this level of qualifying assets can be maintained by Astoria Federal. Astoria Federal's deduction for additions to its bad debt reserve with respect to qualifying loans may be computed using the experience method or a percentage equal to 32% of Astoria Federal's taxable income, computed with certain modifications, without regard to Astoria Federal's actual loss experience, and reduced by the amount of any addition permitted to the reserve for non-qualifying loans, or NYS Percentage of Taxable Income Method. Astoria Federal's deduction with respect to non-qualifying loans must be computed under the experience method which is based on its actual loss experience. Under the experience method, the amount of a reasonable addition, in general, equals the amount necessary to increase the balance of the bad debt reserve at the close of the taxable year to the greater of (1) the amount that bears the same ratio to loans outstanding at the close of the taxable year as the total net bad debts sustained during the current and five preceding taxable years bears to the sum of the loans outstanding at the close of those six years, or (2) the balance of the bad debt reserve at the close of the base year (assuming that the loans outstanding have not declined since then). The "base year" for these purposes is the last taxable year beginning before the NYS Percentage of Taxable Income Method bad debt deduction was taken. Any deduction for the addition to the reserve for non-qualifying loans reduces the addition to the reserve for qualifying real property loans calculated under the NYS Percentage of Taxable Income Method. Each year Astoria Federal reviews the most favorable way to calculate the deduction attributable to an addition to the bad debt reserve. The amount of the addition to the reserve for losses on qualifying real property loans under the NYS Percentage of Taxable Income Method cannot exceed the amount necessary to increase the balance of the reserve for losses on qualifying real property loans at the close of the taxable year to 6% of the balance of the qualifying real property loans outstanding at the end of the taxable year. Also, if the qualifying thrift uses the NYS Percentage of Taxable Income Method, then the qualifying thrift's aggregate addition to its reserve for losses on qualifying real property loans cannot, when added to the addition to the reserve for losses on non-qualifying loans, exceed the amount by which 12% of the amount that the total deposits or withdrawable accounts of depositors of the qualifying thrift at the close of the taxable year exceeded the sum of the qualifying thrift's surplus, undivided profits and reserves at the beginning of such year. 28 New York City Taxation Astoria Federal is also subject to the New York City Financial Corporation Tax calculated, subject to a New York City income and expense allocation, on a similar basis as the New York State Franchise Tax. New York City has enacted legislation regarding the use and treatment of tax bad debt reserves that is substantially similar to the New York State legislation described above. A significant portion of Astoria Federal's entire net income for New York City purposes is allocated outside the jurisdiction which has the effect of significantly reducing the New York City taxable income of Astoria Federal. Delaware Taxation As a Delaware holding company not earning income in Delaware, we are exempt from Delaware corporate income tax but are required to file an annual report with and pay an annual franchise tax to the State of Delaware. ITEM 1A. RISK FACTORS The following is a summary of risk factors relevant to our operations which should be carefully reviewed. These risk factors do not necessarily appear in the order of importance. Changes in interest rates may reduce our net income. Our earnings depend largely on the relationship between the yield on our interest-earning assets, primarily our mortgage loans and mortgage-backed securities, and the cost of our deposits and borrowings. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by economic and competitive factors which influence market interest rates, the volume and mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. Fluctuations in market interest rates affect customer demand for our products and services. We are subject to interest rate risk to the degree that our interest-bearing liabilities reprice or mature more slowly or more rapidly or on a different basis than our interest-earning assets. In addition, the actual amount of time before mortgage loans and mortgage-backed securities are repaid can be significantly impacted by changes in mortgage prepayment rates and market interest rates. Mortgage prepayment rates will vary due to a number of factors, including the regional economy in the area where the underlying mortgages were originated, seasonal factors, demographic variables and the assumability of the underlying mortgages. However, the major factors affecting prepayment rates are prevailing interest rates, related mortgage refinancing opportunities and competition. Some of our borrowings contain features that would allow them to be called prior to their contractual maturity. This would generally occur during periods of rising interest rates. If this were to occur, we would need to either renew the borrowings at a potentially higher rate of interest, which would negatively impact our net interest income, or repay such borrowings. If we sell securities to fund the repayment of such borrowings, any decline in estimated market value with respect to the securities sold would be realized and could result in a loss upon such sale. During 2005, the Federal Open Market Committee, or FOMC, raised the federal funds rate eight times (a total of 200 basis points). As a result, U.S. Treasury yields at December 31, 2005 have increased from December 31, 2004, with the exception of the thirty year U.S. Treasury yield, which has decreased. Although U.S. Treasury yields have risen, yields on the longer end of the U.S. Treasury yield curve have not risen to the same degree as shorter term yields. This has resulted in a significant flattening of the U.S. Treasury yield curve, which began in the latter half of 2004 and continued during 2005. Our short-term borrowings, as well as our deposits, are generally priced relative to short-term U.S. Treasury yields whereas our mortgage loans and mortgage-backed securities are generally priced relative to medium-term (two to five years) U.S. Treasury yields. The flattening of the yield curve reduces the spread between the yield on our interest-earning assets and the cost of our deposits and borrowings, thereby reducing our net income. 29 Interest rates do and will continue to fluctuate, and we cannot predict future Federal Reserve Board actions or other factors that will cause rates to change. Changes in interest rates may reduce our stockholders' equity. At December 31, 2005, $1.84 billion of our securities were classified as available-for-sale. The estimated fair value of our available-for-sale securities portfolio may increase or decrease depending on changes in interest rates. In general, as interest rates rise, the estimated fair value of our fixed rate securities portfolio will decrease. Our securities portfolio is comprised primarily of fixed rate securities. We increase or decrease stockholders' equity by the amount of the change in estimated fair value of our available-for-sale securities portfolio, net of the related tax benefit, under the category of accumulated other comprehensive income/loss. Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported stockholders' equity, as well as book value per common share and tangible book value per common share. This decrease will occur even though the securities are not sold. If these securities are never sold, the decrease will be recovered over the life of the securities. Our results of operations are affected by economic conditions in the New York metropolitan area. Our retail banking and a significant portion of our lending business (41.6% of our mortgage loan portfolio at December 31, 2005) are concentrated in the New York metropolitan area. As a result of this geographic concentration, our results of operations largely depend upon economic conditions in this area. Decreases in real estate values could adversely affect the value of property used as collateral for our loans. Adverse changes in the economy caused by inflation, recession, unemployment or other factors beyond our control may also have a negative effect on the ability of our borrowers to make timely loan payments, which would have an adverse impact on our earnings. Consequently, a deterioration in economic conditions in the New York metropolitan area could have a material adverse impact on the quality of our loan portfolio, which could result in an increase in delinquencies, causing a decrease in our interest income as well as an adverse impact on our loan loss experience, causing an increase in our allowance for loan losses. Such a deterioration also could adversely impact the demand for our products and services, and, accordingly, on our results of operations. Strong competition within our market areas could hurt our profits and slow growth. The New York metropolitan area has a high density of financial institutions, a number of which are significantly larger and have greater financial resources than we have. Additionally over the past several years, various large out-of-state financial institutions have entered the New York metropolitan area market. All are our competitors to varying degrees. We face intense competition both in making loans and attracting deposits. Our competition for loans, both locally and in the aggregate, comes principally from mortgage banking companies, commercial banks, savings banks and savings and loan associations. Our most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. We also face competition for deposits from money market mutual funds and other corporate and government securities funds as well as from other financial intermediaries such as brokerage firms and insurance companies. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which would reduce our net interest income. Competition also makes it more difficult to grow our loan and deposit balances. Our profitability depends upon our continued ability to compete successfully in our market areas. Our increased emphasis on multi-family and commercial real estate lending may expose us to increased lending risks. At December 31, 2005, $3.90 billion, or 27.3%, of our total loan portfolio consisted of multi-family and commercial real estate loans. While we continue to primarily be a one-to-four family mortgage lender, over the past several years we have increased our emphasis on multi-family and commercial real estate 30 loan originations and intend to continue to emphasize this type of lending. Multi-family and commercial real estate loans generally involve a greater degree of credit risk than one-to-four family loans because they typically have larger balances and are more affected by adverse conditions in the economy. Because payments on loans secured by multi-family properties and commercial real estate often depend upon the successful operation and management of the properties and the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower's control, such as adverse conditions in the real estate market or the economy or changes in government regulation. As a result of our efforts to continue to grow the multi-family and commercial real estate loan portfolios, we have increased our emphasis on originations of multi-family and commercial real estate loans in states other than New York. Originations in states other than New York represented 34.6% of our total originations of multi-family and commercial real estate loans in 2005, of which 85.9% were originated in New Jersey, Connecticut and Florida. We could be subject to additional risks with respect to multi-family and commercial real estate lending in states other than New York as we have less experience in these areas with this type of lending and less direct oversight of the borrowers. Astoria Federal's ability to pay dividends or lend funds to us is subject to regulatory limitations which, to the extent we need but are not able to access such funds, may prevent us from making future dividend payments or principal and interest payments due on our debt obligations. We are a unitary savings and loan association holding company regulated by the OTS and almost all of our operating assets are owned by Astoria Federal. We rely primarily on dividends from Astoria Federal to pay cash dividends to our stockholders, to engage in share repurchase programs and to pay principal and interest on our debt obligations. The OTS regulates all capital distributions by Astoria Federal directly or indirectly to us, including dividend payments. As the subsidiary of a savings and loan association holding company, Astoria Federal must file a notice with the OTS at least 30 days prior to each capital distribution. However, if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years, then Astoria Federal must file an application to receive the approval of the OTS for a proposed capital distribution. In addition, Astoria Federal may not pay dividends to us if, after paying those dividends, it would fail to meet the required minimum levels under risk-based capital guidelines and the minimum leverage and tangible capital ratio requirements or the OTS notified Astoria Federal that it was in need of more than normal supervision. Under the prompt corrective action provisions of the FDIA, an insured depository institution such as Astoria Federal is prohibited from making a capital distribution, including the payment of dividends, if, after making such distribution, the institution would become "undercapitalized" (as such term is used in the FDIA). Based on Astoria Federal's current financial condition, we do not expect that this provision will have any impact on our ability to obtain dividends from Astoria Federal. Payment of dividends by Astoria Federal also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe or unsound banking practice. There can be no assurance that Astoria Federal will be able to pay dividends at past levels, or at all, in the future. In addition to regulatory restrictions on the payment of dividends, Astoria Federal is subject to certain restrictions imposed by federal law on any extensions of credit it makes to its affiliates and on investments in stock or other securities of its affiliates. We are considered an affiliate of Astoria Federal. These restrictions prevent affiliates of Astoria Federal, including us, from borrowing from Astoria Federal, unless various types of collateral secure the loans. Federal law limits the aggregate amount of loans to and investments in any single affiliate to 10% of Astoria Federal's capital stock and surplus and also limits the aggregate amount of loans to and investments in all affiliates to 20% of Astoria Federal's capital stock and surplus. 31 If we do not receive sufficient cash dividends or borrowings from Astoria Federal, then we may not have sufficient funds to pay dividends, repurchase our common stock or service our debt obligations. We operate in a highly regulated industry, which limits the manner and scope of our business activities. We are subject to extensive supervision, regulation and examination by the OTS and by the FDIC. As a result, we are limited in the manner in which we conduct our business, undertake new investments and activities and obtain financing. This regulatory structure is designed primarily for the protection of the deposit insurance funds and our depositors, and not to benefit our stockholders. This regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to capital levels, the timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. In addition, we must comply with significant anti-money laundering and anti-terrorism laws. Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply with these laws. Changes in laws, government regulation and monetary policy may have a material effect on our results of operations. Financial institution regulation has been the subject of significant legislation and may be the subject of further significant legislation in the future, none of which is in our control. Significant new laws or changes in, or repeals of, existing laws, including with respect to federal and state taxation, may cause our results of operations to differ materially. In addition, cost of compliance could adversely affect our ability to operate profitably. Further, federal monetary policy significantly affects credit conditions for Astoria Federal, particularly as implemented through the Federal Reserve System, primarily through open market operations in U.S. government securities, the discount rate for bank borrowings and reserve requirements. A material change in any of these conditions would have a material impact on Astoria Federal, and therefore on our results of operations. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES We operate 86 full-service banking offices, of which 50 are owned and 36 are leased. We own our principal executive office and the office for our mortgage operations, both located in Lake Success, New York. We also lease office facilities for our wholly-owned subsidiaries Fidata in Norwalk, Connecticut, and Suffco in Farmingdale, New York. We believe such facilities are suitable and adequate for our operational needs. We are obligated under a lease commitment through 2017 for our previous mortgage operating facility in Mineola, New York which we no longer occupy. At December 31, 2005 this facility was fully sublet. For further information regarding our lease obligations, see Item 7, "MD&A" and Note 11 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." ITEM 3. LEGAL PROCEEDINGS In the ordinary course of our business, we are routinely made defendant in or a party to a number of pending or threatened legal actions or proceedings which, in some cases, seek substantial monetary damages from or other forms of relief against us. In our opinion, after consultation with legal counsel, we believe it unlikely that such actions or proceedings will have a material adverse effect on our financial condition, results of operations or liquidity. 32 We are a party to two actions pending in the U.S. Court of Federal Claims against the United States, involving assisted acquisitions made in the early 1980's and supervisory goodwill accounting utilized in connection therewith, or goodwill litigation, which could result in a gain. The trial in one of the actions, which is entitled The Long Island Savings Bank, FSB et al vs. The United States, or the LISB goodwill litigation, commenced on January 18, 2005 and concluded on July 7, 2005. We asked the court to award damages totaling $594.0 million from the U.S. government for breach of contract in connection with a 1983 Assistance Agreement between the Long Island Savings Bank, FSB, which was acquired by us in 1998, and the Federal Savings and Loan Insurance Corporation. The Court rendered a decision on September 15, 2005 awarding us $435.8 million in damages from the U.S. government in this action. On December 14, 2005, the United States filed a notice of appeal. No assurance can be given as to the timing, content or ultimate outcome of any such appeal. No portion of the $435.8 million award has been recognized in our consolidated financial statements. Legal expense has been recognized as it was incurred. The other action, entitled Astoria Federal Savings and Loan Association vs. United States, has not yet been scheduled for trial. The Court is currently considering a summary judgment motion filed by the U.S. government. The ultimate outcomes of the two actions pending against the United States and the timing of such outcomes are uncertain and there can be no assurance that we will benefit financially from such litigation. On or about February 24, 2005, the Attorney General of the State of New York, or the Attorney General, served on Astoria Federal a subpoena duces tecum, or the Subpoena, seeking documents and information concerning, among other things, our contractual relationship with Independent Financial Marketing Group, Inc., or IFMG, IFMG Securities, Inc. and IFS Agencies, Inc., and the marketing and sale of Alternative Investment Products (i.e., financial products that are not bank instruments insured by the FDIC). On several occasions thereafter in 2005, and again in January 2006, the Attorney General supplemented the Subpoena with requests for additional documents and information. Our arrangements with IFMG impose on IFMG compliance, disclosure and oversight-related obligations in connection with their sale of Alternative Investment Products to our customers at our branch locations. In this regard, we believe we are in full compliance with the Interagency Statement on Retail Sales of Nondeposit Investment Products issued by the federal bank regulatory authorities and Part 536 of the OTS Regulations regarding Consumer Protection in the Sale of Insurance. We are cooperating with the Attorney General's inquiry. No charges of wrongdoing on our part in connection with the sale of Alternative Investment Products have been filed by the Attorney General against us. Given the current status of the inquiry, no assurance can be given as to when the inquiry may be concluded, the ultimate result of the inquiry or any potential impact on our financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the quarter ended December 31, 2005 to a vote of our security holders through the solicitation of proxies or otherwise. 33 PART II ITEM 5. MARKET FOR ASTORIA FINANCIAL CORPORATION'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock trades on the New York Stock Exchange, or NYSE, under the symbol "AF." The table below shows the high and low sale prices reported on the NYSE for our common stock during the periods indicated. 2005 2004 -------------------------------------- High Low High Low - ------------------------------------------------------- First Quarter $27.20 $ 24.30 $28.37 $23.63 Second Quarter 28.85 23.80 25.73 22.17 Third Quarter 30.20 25.70 24.82 22.21 Fourth Quarter 30.35 24.43 27.81 23.15 As of February 15, 2006, we had approximately 3,700 shareholders of record. As of December 31, 2005, there were 104,967,280 shares of common stock outstanding. The following schedule summarizes the cash dividends paid per common share for 2005 and 2004. 2005 2004 -------------------------------------------------------------------- First Quarter $0.20 $0.16 Second Quarter 0.20 0.17 Third Quarter 0.20 0.17 Fourth Quarter 0.20 0.17 In addition to cash dividends, on March 1, 2005, stockholders received one additional share of our common stock for every two shares owned pursuant to a three-for-two common stock split declared on January 19, 2005 by our Board of Directors. On January 25, 2006, our Board of Directors declared a quarterly cash dividend of $0.24 per common share, payable on March 1, 2006, to common stockholders of record as of the close of business on February 15, 2006. Our Board of Directors intends to review the payment of dividends quarterly and plans to continue to maintain a regular quarterly dividend in the future, dependent upon our earnings, financial condition and other factors. We are subject to the laws of the State of Delaware which generally limit dividends to an amount equal to the excess of our net assets (the amount by which total assets exceed total liabilities) over our statutory capital, or if there is no such excess, to our net profits for the current and/or immediately preceding fiscal year. We are also subject to certain financial covenants and other limitations pursuant to the terms of various debt instruments that have been issued by us, which could have an impact on our ability to pay dividends in certain circumstances. See Item 7, "MD&A - Liquidity and Capital Resources" for further discussion of such financial covenants and other limitations. Our payment of dividends is dependent, in large part, upon receipt of dividends from Astoria Federal. Astoria Federal is subject to certain restrictions which may limit its ability to pay us dividends. See Item 1, "Business - Regulation and Supervision" and Note 9 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" for an explanation of the impact of regulatory capital requirements on Astoria Federal's ability to pay dividends. See Item 1, "Business - Federal Taxation" and Note 12 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" for an explanation of the tax impact of the unlikely event that Astoria Federal (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes; (2) redeems its stock; or (3) liquidates. 34 The following table sets forth the repurchases of our common stock by month during the three months ended December 31, 2005.
Total Number Maximum Total of Shares Number of Shares Number of Average Purchased as Part that May Yet Be Shares Price Paid of Publicly Purchased Under the Period Purchased per Share Announced Plans Plans (1) - ------------------------------------------------------------------------------------------- October 1, 2005 through October 31, 2005 570,000 $26.68 570,000 2,192,300 November 1, 2005 through November 30, 2005 1,120,000 $28.53 1,120,000 1,072,300 December 1, 2005 through December 31, 2005 810,000 $29.32 810,000 262,300 - ------------------------------------------------------------------------------------------- Total 2,500,000 $28.37 2,500,000 ===========================================================================================
(1) Excludes 10,000,000 shares that may yet be purchased under the eleventh stock repurchase plan, approved by our Board of Directors on December 21, 2005, which commenced immediately following the completion of the tenth stock repurchase plan on January 10, 2006. All of the shares repurchased during the three months ended December 31, 2005 were repurchased under our tenth stock repurchase plan, approved by our Board of Directors on May 19, 2004, which authorized the purchase, at management's discretion, of 12,000,000 shares, or approximately 10% of our common stock then outstanding, over a two year period in open-market or privately negotiated transactions. On June 10, 2005, our Chief Executive Officer, George L. Engelke, Jr., submitted his annual certification to the NYSE indicating that he was not aware of any violation by Astoria Financial Corporation of NYSE corporate governance listing standards as of the June 10, 2005 certification date. 35 ITEM 6. SELECTED FINANCIAL DATA Set forth below are our selected consolidated financial and other data. This financial data is derived in part from, and should be read in conjunction with, our consolidated financial statements and related notes.
At December 31, ------------------------------------------------------------------------ (In Thousands) 2005 2004 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- Selected Financial Data: Total assets $ 22,380,271 $ 23,415,869 $ 22,461,594 $ 21,701,758 $ 22,671,635 Federal funds sold and repurchase agreements 182,803 267,578 65,926 510,252 1,309,164 Securities available-for-sale 1,841,351 2,406,883 2,654,992 2,792,581 3,549,183 Securities held-to-maturity 4,730,953 6,302,936 5,792,727 5,041,257 4,463,928 Loans receivable, net 14,311,134 13,180,521 12,603,866 11,975,815 12,084,976 Deposits 12,810,455 12,323,257 11,186,594 11,067,196 10,903,693 Borrowings, net 7,937,526 9,469,835 9,632,037 8,825,046 9,825,661 Stockholders' equity 1,350,227 1,369,764 1,396,531 1,553,998 1,542,586
For the Year Ended December 31, ------------------------------------------------------------------------ (In Thousands, Except Per Share Data) 2005 2004 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- Selected Operating Data: Interest income $ 1,082,987 $ 1,045,901 $ 1,057,291 $ 1,266,262 $ 1,438,563 Interest expense 604,207 575,335 677,753 801,838 981,605 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 478,780 470,566 379,538 464,424 456,958 Provision for loan losses - - - 2,307 4,028 - ----------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 478,780 470,566 379,538 462,117 452,930 Non interest income 102,199 80,084 119,561 107,407 90,105 Non interest expense: General and administrative 228,734 225,011 205,877 195,827 178,767 Extinguishment of debt - - - 2,202 - Amortization of goodwill - - - - 19,078 - ----------------------------------------------------------------------------------------------------------------------- Total non-interest expense 228,734 225,011 205,877 198,029 197,845 - ----------------------------------------------------------------------------------------------------------------------- Income before income tax expense and cumulative effect of accounting change 352,245 325,639 293,222 371,495 345,190 Income tax expense 118,442 106,102 96,376 123,066 120,036 - ----------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 233,803 219,537 196,846 248,429 225,154 Cumulative effect of accounting change, net of tax - - - - (2,294) - ----------------------------------------------------------------------------------------------------------------------- Net income 233,803 219,537 196,846 248,429 222,860 Preferred dividends declared - - 4,500 6,000 6,000 - ----------------------------------------------------------------------------------------------------------------------- Net income available to common shareholders $ 233,803 $ 219,537 $ 192,346 $ 242,429 $ 216,860 ======================================================================================================================= Basic earnings per common share $ 2.30 $ 2.03 $ 1.68 $ 1.94 $ 1.60 Diluted earnings per common share $ 2.26 $ 2.00 $ 1.66 $ 1.90 $ 1.57
36
At or For the Year Ended December 31, ------------------------------------------------------------------- 2005 2004 2003 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- Selected Financial Ratios and Other Data: Return on average assets 1.02% 0.97% 0.87% 1.12% 0.99% Return on average stockholders' equity 17.06 15.81 13.26 15.87 14.13 Return on average tangible stockholders' equity (1) 19.72 18.25 15.15 18.00 16.12 Average stockholders' equity to average assets 5.99 6.12 6.54 7.07 7.00 Average tangible stockholders' equity to average tangible assets (1)(2) 5.22 5.35 5.78 6.28 6.19 Stockholders' equity to total assets 6.03 5.85 6.22 7.16 6.80 Net interest rate spread 2.11 2.09 1.72 2.11 1.91 Net interest margin 2.19 2.17 1.78 2.23 2.12 Average interest-earning assets to average interest-bearing liabilities 1.03x 1.03x 1.02x 1.03x 1.05x General and administrative expense to average assets 1.00% 0.99% 0.91% 0.88% 0.79% Efficiency ratio (3) 39.37 40.86 41.25 34.25 32.68 Cash dividends paid per common share $ 0.80 $ 0.67 $ 0.57 $ 0.51 $ 0.41 Dividend payout ratio 35.40% 33.50% 34.34% 26.84% 26.11% Asset Quality Ratios: Non-performing loans to total loans (4) 0.45 0.25 0.23 0.29 0.31 Non-performing loans to total assets (4) 0.29 0.14 0.13 0.16 0.16 Non-performing assets to total assets (4)(5) 0.30 0.14 0.14 0.16 0.18 Allowance for loan losses to non-performing loans (4) 124.81 254.02 280.10 242.04 221.70 Allowance for loan losses to non-accrual loans 125.15 258.57 285.51 249.53 229.60 Allowance for loan losses to total loans 0.56 0.62 0.66 0.69 0.68 Other Data: Number of deposit accounts 953,998 975,155 963,120 990,873 985,473 Mortgage loans serviced for others (in thousands) $ 1,502,852 $ 1,670,062 $ 1,895,102 $ 2,671,085 $ 3,322,087 Full service banking offices 86 86 86 86 86 Regional lending offices 3 4 3 1 1 Full time equivalent employees 1,658 1,862 1,971 1,956 1,885
(1) Average tangible stockholders' equity represents average stockholders' equity less average goodwill. (2) Average tangible assets represents average assets less average goodwill. (3) Efficiency ratio represents general and administrative expense divided by the sum of net interest income plus non-interest income. (4) Non-performing loans consist of all non-accrual loans and all mortgage loans delinquent 90 days or more as to their maturity date but not their interest due and exclude loans which have been restructured and are accruing and performing in accordance with the restructured terms. Restructured accruing loans totaled $1.6 million, $2.8 million, $3.9 million, $5.0 million and $5.4 million at December 31, 2005, 2004, 2003, 2002 and 2001, respectively. (5) Non-performing assets consist of all non-performing loans and real estate owned. 37 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this report. Executive Summary The following overview should be read in conjunction with our MD&A in its entirety. As a premier Long Island community bank, our goal is to enhance shareholder value while building a solid banking franchise. We focus on growing our core businesses of mortgage lending and retail banking while maintaining superior asset quality and controlling operating expenses. Additionally, we continue to provide returns to shareholders through increased dividends and our stock repurchases. We have been successful in achieving this goal over the past several years and that trend has continued during 2005. During the year ended December 31, 2005, the national and local real estate markets remained strong and continued to support new and existing home sales. The FOMC raised the federal funds rate eight times during 2005. As a result, U.S. Treasury yields at December 31, 2005 have increased from December 31, 2004, with the exception of the thirty year U.S. Treasury yield, which has decreased. Although U.S. Treasury yields have risen, yields on the longer end of the U.S. Treasury yield curve have not risen to the same degree as shorter term yields. This has resulted in a significant flattening of the U.S. Treasury yield curve, which began in the latter half of 2004 and continued during 2005. In addition, changes in medium- and long-term yields within individual quarters have resulted in variability in cash flows and refinance activity during 2005. As a result of the U.S. Treasury yield curve environment that prevailed during 2005, we pursued a strategy of shrinking the balance sheet through a reduction in the securities and borrowings portfolios through normal cash flow, while emphasizing deposit and loan growth. Our total loan portfolio increased during the year ended December 31, 2005. This increase was a result of the increase in our mortgage loan portfolio due to the overall reduction in repayment activity in 2005 as compared to 2004, coupled with continued strong loan origination volume. Total deposits increased during the year ended December 31, 2005. This increase was primarily attributable to our certificates of deposit and our new Liquid CDs as a result of the continued success of our marketing campaigns which have focused on attracting these types of deposits. Growth in our certificates of deposit and Liquid CDs contributes to the management of interest rate risk, enables us to reduce our borrowing levels and continues to produce new customers from our communities, creating relationship development opportunities. Our securities and borrowings portfolios decreased from December 31, 2004, which is consistent with our strategy of reducing these portfolios through normal cash flow in response to the continued flattening of the U.S. Treasury yield curve. During the third quarter of 2005 we entered into a sub-servicing agreement with DMI to outsource our mortgage loan servicing activities. Pursuant to this sub-servicing agreement, effective December 1, 2005, DMI has undertaken the servicing of our mortgage loan portfolio, including our portfolio of mortgage loans serviced for other investors. The decision to take this action was driven by economics as we continue to strive to increase operating efficiency in all aspects of our operations. While our individual mortgage loan balances are currently larger than in prior years, the number of loans we service has decreased over the past several years, thereby lowering operating efficiency. In addition, we implemented other company-wide cost saving initiatives in an effort to improve future operating efficiency. Our results of operations for year ended December 31, 2005 include $1.9 million, before tax, 38 in charges related to the outsourcing of our mortgage loan servicing activities and other company-wide cost saving initiatives. These initiatives, which resulted in staff reductions primarily in our mortgage servicing, retail banking and loan origination areas, are expected to result in annual net expense savings of approximately $5.0 million, before tax, beginning in 2006. Net income for 2005 increased from the prior year. This increase was primarily due to increases in net interest income and non-interest income. The increase in net interest income is attributable to an increase in interest income, partially offset by an increase in interest expense. The increase in interest income was primarily due to the increase in the average balance of interest-earning assets, coupled with a decrease in net premium amortization on our mortgage-backed securities and mortgage loan portfolios. The decrease in net premium amortization was primarily due to the reduction in repayment levels during 2005, as well as the reduced amount of unamortized premium remaining in our mortgage-backed securities portfolio. The increase in interest expense is primarily due to an increase in interest expense on certificates of deposit and Liquid CDs as a result of the increases in the average balances of these deposits, partially offset by the decrease in interest expense on borrowings primarily resulting from the decrease in the average balance of borrowings. The increase in non-interest income relates primarily to the other-than-temporary impairment write-down on our FHLMC perpetual preferred securities in the 2004 fourth quarter, coupled with an increase in customer service fees, partially offset by the absence of gains on sales of securities in 2005. We expect the operating environment to remain challenging throughout 2006 as rising short-term interest rates and relatively stable medium- and long-term interest rates exert further pressure on the net interest margin. As a result, we expect to continue our strategy of shrinking the balance sheet through a reduction in the securities and borrowings portfolios through normal cash flow, while we emphasize deposit and loan growth, all of which should continue to improve both the quality of the balance sheet and earnings. Overall, these activities should result in a further reduction in the balance sheet similar to the 2005 reduction. Additionally, we anticipate that the net interest margin will be somewhat lower in 2006 as compared to 2005, but should not decline below an average of 2.00% for the full year. As we continue to reduce the size of the balance sheet during this challenging interest rate environment, we will continue to focus on the repurchase of our stock as a very desirable use of capital. Critical Accounting Policies Note 1 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" contains a summary of our significant accounting policies. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Our policies with respect to the methodologies used to determine the allowance for loan losses, the valuation of MSR and judgments regarding goodwill and securities impairment are our most critical accounting policies because they are important to the presentation of our financial condition and results of operations, involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in our results of operations or financial condition. The following is a description of our critical accounting policies and an explanation of the methods and assumptions underlying their application. These critical accounting policies and their application are reviewed quarterly with the Audit Committee of our Board of Directors. Allowance for Loan Losses Our allowance for loan losses is established and maintained through a provision for loan losses based on our evaluation of the risks inherent in our loan portfolio. We evaluate the adequacy of our allowance on a quarterly basis. The allowance is comprised of both specific valuation allowances and general valuation allowances. Specific valuation allowances are established in connection with individual loan reviews and the asset classification process including the procedures for impairment recognition under Statement of Financial 39 Accounting Standards, or SFAS, No. 114, "Accounting by Creditors for Impairment of a Loan, an Amendment of FASB Statements No. 5 and 15," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, an Amendment of FASB Statement No. 114." Such evaluation, which includes a review of loans on which full collectibility is not reasonably assured, considers the estimated fair value of the underlying collateral, if any, current and anticipated economic and regulatory conditions, current and historical loss experience of similar loans and other factors that determine risk exposure to arrive at an adequate loan loss allowance. Individual loan loss reviews are completed quarterly for all classified loans. Individual loan loss reviews are generally completed annually for multi-family, commercial real estate and construction loans in excess of $2.5 million, commercial business loans in excess of $200,000, one-to-four family loans in excess of $1.0 million and debt restructurings. In addition, we generally review annually at least fifty percent of the outstanding balances of multi-family, commercial real estate and construction loans to single borrowers with concentrations in excess of $2.5 million. The primary considerations in establishing specific valuation allowances are the appraised value of a loan's underlying collateral and the loan's payment history. Other current and anticipated economic conditions on which our specific valuation allowances rely are the impact that national and/or local economic and business conditions may have on borrowers, the impact that local real estate markets may have on collateral values and the level and direction of interest rates and their combined effect on real estate values and the ability of borrowers to service debt. We also review all regulatory notices, bulletins and memoranda with the purpose of identifying upcoming changes in regulatory conditions which may impact our calculation of specific valuation allowances. The OTS periodically reviews our specific reserve methodology during regulatory examinations and any comments regarding changes to reserves are considered by management in determining specific valuation allowances. Pursuant to our policy, loan losses are charged-off in the period the loans, or portions thereof, are deemed uncollectible. The determination of the loans on which full collectibility is not reasonably assured, the estimates of the fair value of the underlying collateral and the assessments of economic and regulatory conditions are subject to assumptions and judgments by management. Specific valuation allowances could differ materially as a result of changes in these assumptions and judgments. General valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with our lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. The determination of the adequacy of the valuation allowance takes into consideration a variety of factors. We segment our loan portfolio into like categories by composition and size and perform analyses against each category. These include historical loss experience and delinquency levels and trends. We analyze our historical loan loss experience by category (loan type) over 3, 5, 10 and 12-year periods. Losses within each loan category are stress tested by applying the highest level of charge-offs and the lowest amount of recoveries as a percentage of the average portfolio balance during those respective time horizons. The resulting allowance percentages are used as an integral part of our judgment in developing estimated loss percentages to apply to the portfolio. We also consider the growth in the portfolio as well as our credit administration and asset management philosophies and procedures. In addition, we evaluate and consider the impact that existing and projected economic and market conditions may have on the portfolio as well as known and inherent risks in the portfolio. We also evaluate and consider the allowance ratios and coverage percentages of both peer group and regulatory agency data; however, our focus is primarily on our historical loss experience and the impact of current economic conditions. After evaluating these variables, we determine appropriate allowance coverage percentages for each of our portfolio segments and the appropriate level of our allowance for loan losses. Our allowance coverage percentages are used to estimate the amount of probable losses inherent in our loan portfolio in determining our general valuation allowances. Our evaluations of general valuation allowances are inherently subjective because, even though they are based on objective data, it is management's interpretation of that data that determines the amount of the appropriate allowance. Therefore, we annually review the actual performance and charge-off history of our portfolio and compare that to our previously determined allowance coverage percentages and specific valuation 40 allowances. In doing so, we evaluate the impact the previously mentioned variables may have had on the portfolio to determine which changes, if any, should be made to our assumptions and analyses. Our loss experience in 2005 has been consistent with our experience over the past several years. Our 2005 analyses did not result in any change in our methodology for determining our general and specific valuation allowances or our emphasis on the factors that we consider in establishing such allowances. Accordingly, such analyses did not indicate that changes in our allowance coverage percentages were required. We believe our current allowance for loan losses is adequate to reflect the risks inherent in our loan portfolio. Actual results could differ from our estimates as a result of changes in economic or market conditions. Changes in estimates could result in a material change in the allowance for loan losses. While we believe that the allowance for loan losses has been established and maintained at levels that reflect the risks inherent in our loan portfolio, future adjustments may be necessary if economic or market conditions differ substantially from the conditions that existed at the time of the initial determinations. For additional information regarding our allowance for loan losses, see "Provision for Loan Losses" and "Asset Quality." Valuation of MSR The cost of MSR is amortized over the estimated remaining lives of the loans serviced. MSR are carried at amortized cost less impairment, if any, which is recognized through a valuation allowance through charges to earnings. The initial recognition of originated MSR is based upon an allocation of the total cost of the related loans between the loans and the servicing rights based on their relative estimated fair values. The fair value of MSR is estimated by reference to quoted market prices of similar loans sold servicing released. Impairment exists if the carrying value of MSR exceeds the estimated fair value. We stratify our MSR by underlying loan type, primarily fixed and adjustable, and further stratify the fixed rate loans by interest rate. Individual impairment allowances for each stratum are established when necessary and then adjusted in subsequent periods to reflect changes in impairment. The estimated fair values of each MSR stratum are obtained through independent third party valuations through an analysis of future cash flows, incorporating numerous market based assumptions including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market's perception of future interest rate movements. All assumptions are reviewed for reasonableness on a quarterly basis to ensure they reflect current and anticipated market conditions. At December 31, 2005, our MSR, net, had an estimated fair value of $16.5 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.07%, a weighted average constant prepayment rate on mortgages of 15.84% and a weighted average life of 4.7 years. At December 31, 2004, our MSR, net, had an estimated fair value of $16.8 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.10%, a weighted average constant prepayment rate on mortgages of 15.33% and a weighted average life of 4.8 years. The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of our MSR. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR. As interest rates rise, mortgage loan prepayments slow down, which results in an increase in the fair value of MSR. Thus, any measurement of the fair value of our MSR is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different point in time. Assuming an increase in interest rates of 100 basis points at December 31, 2005, the estimated fair value of our MSR would have been $3.9 million greater. Assuming a decrease in interest rates of 100 basis points at December 31, 2005, the estimated fair value of our MSR would have been $6.4 million lower. 41 Goodwill Impairment Goodwill is presumed to have an indefinite useful life and is tested, at least annually, for impairment at the reporting unit level. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. For purposes of our goodwill impairment testing, we have identified a single reporting unit. We use the quoted market price of our common stock on our impairment testing date as the basis for determining the fair value of our reporting unit. If the fair value of our reporting unit exceeds its carrying amount, further evaluation is not necessary. However, if the fair value of our reporting unit is less than its carrying amount, further evaluation is required to compare the implied fair value of the reporting unit's goodwill to its carrying amount to determine if a write-down of goodwill is required. On September 30, 2005, we performed our annual goodwill impairment test. We determined the fair value of our reporting unit to be in excess of its carrying amount by $1.44 billion. Accordingly, as of our annual impairment test date, there was no indication of goodwill impairment. We would test our goodwill for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount. No events have occurred and no circumstances have changed since our annual impairment test date that would more likely than not reduce the fair value of our reporting unit below its carrying amount. The identification of additional reporting units or the use of other valuation techniques could result in materially different evaluations of impairment. Securities Impairment Our available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders' equity. Debt securities which we have the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. The fair values of our securities, which are primarily fixed rate mortgage-backed securities at December 31, 2005, are based on published or securities dealers' market values and are affected by changes in interest rates. In general, as interest rates rise, the fair value of fixed rate securities will decrease; as interest rates fall, the fair value of fixed rate securities will increase. We conduct a periodic review and evaluation of the securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary. We generally view changes in fair value caused by changes in interest rates as temporary, which is consistent with our experience. If we deem such decline to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged to earnings as a component of non-interest income. At December 31, 2005, we had 228 securities with an estimated fair value totaling $6.33 billion which had an unrealized loss totaling $190.0 million. Of the securities in an unrealized loss position at December 31, 2005, $3.37 billion, with an unrealized loss of $142.6 million, have been in a continuous unrealized loss position for more than twelve months. At December 31, 2005, the impairments are deemed temporary based on the direct relationship of the decline in fair value to movements in interest rates, the estimated remaining life and high credit quality of the investments and our ability and intent to hold these investments until there is a full recovery of the unrealized loss, which may be maturity. There were no other-than-temporary impairment write-downs during the year ended December 31, 2005. During the 2004 fourth quarter, we recorded a $16.5 million other-than-temporary impairment write-down charge on $120.0 million face value of perpetual preferred stock issued by FHLMC which is included as a component of non-interest income in our 2004 results of operations. The FHLMC perpetual preferred securities are investment grade securities, rated AA- by Standard & Poor's and Aa3 by Moody's Investors Service, held in our available-for-sale securities portfolio. The decision to recognize the other-than-temporary impairment charge was based on a conservative interpretation of accounting literature. Similar to debt securities, changes in the estimated fair value of these FHLMC perpetual preferred securities are primarily attributable to changes in market interest rates. However, as these securities are equity instruments with no stated maturity date, they cannot be evaluated in the same manner as the changes in the estimated fair value of debt instruments, according to authoritative literature. While we believed the estimated fair value of these securities would have increased back to their amortized cost in the future, we could not have predicted with certainty at December 31, 2004 that such a recovery would 42 have occurred in the near term, particularly since a recovery would have been predicated on a decline in market interest rates. The write-down does not change our expectation of the long-term value of these investment grade securities. In November 2005, the FASB issued Staff Position Nos. 115-1 and 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," or FSP No. 115-1, which addresses the determination of when an investment is considered impaired, whether the impairment is other-than-temporary and how to measure an impairment loss. FSP No. 115-1 is effective for reporting periods beginning after December 15, 2005. We do not expect our application of FSP No. 115-1 to have a material impact on our financial condition or results of operations. For additional information, see "Impact of Accounting Standards and Interpretations" and Note 3 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." Liquidity and Capital Resources Our primary source of funds is cash provided by principal and interest payments on loans and securities. The most significant liquidity challenge we face is the variability in cash flows as a result of mortgage refinance activity. As mortgage interest rates increase, customers' refinance activities tend to decelerate causing the cash flow from both our mortgage loan portfolio and our mortgage-backed securities portfolio to decrease. When mortgage rates decrease, the opposite tends to occur. Principal payments on loans and securities totaled $5.40 billion for the year ended December 31, 2005 and $6.42 billion for the year ended December 31, 2004. The decrease in loan and security repayments was primarily the result of the lower levels of mortgage loan refinance activity we experienced in 2005 as compared to 2004. In addition to cash provided by principal and interest payments on loans and securities, our other sources of funds include cash provided by operating activities, deposits and borrowings. Net cash provided by operating activities totaled $271.6 million during the year ended December 31, 2005 and $277.4 million during the year ended December 31, 2004. Deposits increased $487.2 million during the year ended December 31, 2005 and $1.14 billion during the year ended December 31, 2004. The net increases in deposits for the years ended December 31, 2005 and 2004 reflect our continued emphasis on attracting customer deposits through competitive rates, extensive product offerings and quality service. As previously discussed, the net increase in deposits for the year ended December 31, 2005 is primarily attributable to an increase in certificates of deposit and our new Liquid CDs as a result of the success of our marketing campaigns which have focused on attracting these types of deposits. During the year ended December 31, 2005, $3.70 billion of certificates of deposit, with a weighted average rate of 2.71% and a weighted average maturity at inception of seventeen months, matured and $4.06 billion of certificates of deposit were issued or repriced, with a weighted average rate of 3.45% and a weighted average maturity at inception of thirteen months. See page 53 for further detail regarding deposit activity. Net borrowings decreased $1.53 billion during the year ended December 31, 2005 and decreased $162.2 million during the year ended December 31, 2004. The decreases in net borrowings during the years ended December 31, 2005 and 2004 reflect our strategy of reducing the securities and borrowings portfolios through normal cash flow in response to the continued flattening of the U.S. Treasury yield curve. Our primary use of funds is for the origination and purchase of mortgage loans. Gross mortgage loans originated and purchased during the year ended December 31, 2005 totaled $4.32 billion, of which $3.45 billion were originations and $874.5 million were purchases. This compares to gross mortgage loans originated and purchased during the year ended December 31, 2004, totaling $4.35 billion, of which $3.19 billion were originations and $1.16 billion were purchases. Total mortgage loans originated include originations of loans held-for-sale totaling $361.5 million during the year ended December 31, 2005 and $323.2 million during the year ended December 31, 2004. Purchases of securities totaled $177.6 million during the year ended December 31, 2005 and $3.07 billion during the year ended December 31, 2004. The decrease in securities purchases during the year ended December 31, 2005 reflects the previously discussed strategy of reducing the securities and borrowings portfolios. 43 We maintain liquidity levels to meet our operational needs in the normal course of our business. The levels of our liquid assets during any given period are dependent on our operating, investing and financing activities. Cash and due from banks and repurchase agreements, our most liquid assets, totaled $352.0 million at December 31, 2005, compared to $406.4 million at December 31, 2004. Borrowings maturing over the next twelve months total $2.24 billion with a weighted average rate of 3.21%. We have the flexibility to either repay or rollover these borrowings as they mature. In addition, we have $4.89 billion in certificates of deposit and Liquid CDs with a weighted average rate of 3.48% maturing over the next twelve months. We expect to retain or replace a significant portion of such deposits based on our competitive pricing and historical experience. The following table details borrowing, certificate of deposit and Liquid CD maturities and their weighted average rates as of December 31, 2005: Certificates of Deposit Borrowings and Liquid CDs --------------------- --------------------------- Weighted Weighted Average Average (Dollars in Millions) Amount Rate Amount Rate - -------------------------------------------------- --------------------------- Contractual Maturity: 2006 $ 2,244 (1) 3.21% $ 4,887 3.48% 2007 1,870 (2) 3.04 1,630 4.06 2008 2,650 (3) 5.01 920 4.12 2009 300 3.29 428 4.18 2010 - - 186 4.29 2011 and thereafter 879 (4) 4.95 30 4.25 ---------------------------------------------------------------------------- Total $ 7,943 3.97% $ 8,081 3.73% ============================================================================ (1) Includes $820.0 million of overnight and other short-term borrowings with a weighted average rate of 4.22%. (2) Includes $50.0 million of borrowings, with a weighted average rate of 5.62%, which are callable by the counterparty in 2006 and at various times thereafter. (3) Includes $2.13 billion of borrowings, with a weighted average rate of 5.27%, which are callable by the counterparty in 2006 and at various times thereafter. (4) Includes $500.0 million of borrowings, with a weighted average rate of 3.32%, which are callable by the counterparty in 2007 and at various times thereafter. Additional sources of liquidity at the holding company level have included issuances of securities into the capital markets, including private issuances of trust preferred securities through our subsidiary, Astoria Capital Trust I, and senior debt. Holding company debt obligations, which are included in other borrowings, are further described below. Our Junior Subordinated Debentures total $128.9 million, have an interest rate of 9.75%, mature on November 1, 2029 and are prepayable, in whole or in part, at our option on or after November 1, 2009 at declining premiums to November 1, 2019, after which the Junior Subordinated Debentures are prepayable at par value. The terms of the Junior Subordinated Debentures limit our ability to pay dividends or otherwise make distributions if we are in default or have elected to defer interest payments otherwise due under the Junior Subordinated Debentures. Such limitations do not apply, however, to dividends payable in our common stock, or our dividend reinvestment plan, our stock option plans or our stockholders rights plan. The Junior Subordinated Debentures were issued to Astoria Capital Trust I as part of the transaction in which Astoria Capital Trust I privately issued trust preferred securities. We have $60.0 million of 7.67% senior unsecured notes, which were issued in a private placement, mature in 2008 and require annual principal payments of $20.0 million, which began in 2004. The terms of these notes preclude a sale of more than 30% of our deposit liabilities and preclude us from incurring long-term debt, which excludes debt of Astoria Federal incurred in the ordinary course of business, including FHLB-NY advances, in excess of 90% of our consolidated stockholders' equity. The terms also require that we maintain a consolidated capital to assets ratio of not less than 4.0%; a non-performing 44 asset ratio, net of our allowance for loan losses, of less than 3.5% of assets; and a consolidated interest coverage ratio of at least 3.0 to 1.0. However, the terms of our 7.67% senior unsecured notes do not preclude our merger or sale of all or substantially all of our assets. As of December 31, 2005, we were in compliance with each of these covenants, and we do not anticipate these covenants will have a material effect on our operations. We have $250.0 million of 5.75% senior unsecured notes which are due in 2012 and are redeemable, in whole or in part, at any time at a "make-whole" redemption price, together with accrued interest to the redemption date. The terms of our $250.0 million 5.75% senior unsecured notes restrict our ability to sell, transfer or pledge as collateral the shares of Astoria Federal or any other significant subsidiary or of all, or substantially all, of the assets of Astoria Federal or any other significant subsidiary, other than in connection with a sale or transfer involving Astoria Financial Corporation. Our ability to continue to access the capital markets for additional financing at favorable terms may be limited by, among other things, market demand, interest rates, our capital levels, Astoria Federal's ability to pay dividends to Astoria Financial Corporation, our credit profile and ratings and our business model. For further discussion of our debt obligations, see Note 8 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." We also continue to receive periodic capital distributions from Astoria Federal, consistent with applicable laws and regulations. During 2005, Astoria Federal paid dividends to Astoria Financial Corporation totaling $200.0 million, amounting to 80.4% of Astoria Federal's net income for 2005. Astoria Financial Corporation's primary uses of funds include the payment of dividends, payment of principal and interest on its debt obligations and repurchases of common stock. Astoria Financial Corporation paid principal and interest on its debt obligations totaling $49.3 million in 2005. Our payment of dividends and repurchases of our common stock, which are further discussed below, totaled $262.1 million in 2005. Our ability to pay dividends, service our debt obligations and repurchase common stock is dependent primarily upon receipt of capital distributions from Astoria Federal. Since Astoria Federal is a federally chartered savings association, there are limits on its ability to make distributions to Astoria Financial Corporation. Additionally, all proposed distributions from Astoria Federal must be submitted to the OTS for review. For further discussion of limitations on capital distributions from Astoria Federal, see "Regulation and Supervision" in Item 1, "Business." We declared cash dividends on our common stock totaling $81.2 million during the year ended December 31, 2005 and $72.0 million during the year ended December 31, 2004. In addition to cash dividends, on March 1, 2005, stockholders received one additional share of our common stock for every two shares owned pursuant to a three-for-two common stock split declared on January 19, 2005. On January 25, 2006, we declared a quarterly cash dividend of $0.24 per share on shares of our common stock, payable on March 1, 2006, to stockholders of record as of the close of business on February 15, 2006. On May 19, 2004, our Board of Directors approved our tenth stock repurchase plan authorizing the purchase, at management's discretion, of 12,000,000 shares, or approximately 10% of our common stock then outstanding, over a two year period in open-market or privately negotiated transactions. During the year ended December 31, 2005, we repurchased 6,582,500 shares of our common stock at an aggregate cost of $180.9 million. In total, as of December 31, 2005, we repurchased 11,737,700 shares of our common stock, at an aggregate cost of $308.6 million, under our tenth stock repurchase plan. On December 21, 2005, our Board of Directors approved our eleventh stock repurchase plan authorizing the purchase, at management's discretion, of 10,000,000 shares, or approximately 10% of our common stock outstanding, through December 31, 2007 in open-market or privately negotiated transactions. Stock repurchases under our eleventh stock repurchase plan commenced immediately following the completion of the tenth stock repurchase plan on January 10, 2006. For further information on our common stock repurchases, see Item 5, "Market for Astoria Financial Corporation's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities." See "Financial Condition" for a further discussion of the changes in stockholders' equity. 45 At December 31, 2005, Astoria Federal's capital levels exceeded all of its regulatory capital requirements with a tangible capital ratio of 6.53%, leverage capital ratio of 6.53% and total risk-based capital ratio of 12.53%. The minimum regulatory requirements are a tangible capital ratio of 1.50%, leverage capital ratio of 4.00% and total risk-based capital ratio of 8.00%. Off-Balance Sheet Arrangements and Contractual Obligations We are a party to financial instruments with off-balance sheet risk in the normal course of our business in order to meet the financing needs of our customers and in connection with our overall interest rate risk management strategy. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts. Such instruments primarily include lending commitments, lease commitments and derivative instruments as described below. Lending commitments include commitments to originate and purchase loans and commitments to fund unused lines of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate creditworthiness on a case-by-case basis. Our maximum exposure to credit risk is represented by the contractual amount of the instruments. In addition to our lending commitments, we have contractual obligations related to operating lease commitments. Operating lease commitments are obligations under various non-cancelable operating leases on buildings and land used for office space and banking purposes. Derivative instruments may include interest rate caps, locks and swaps which are recorded as either assets or liabilities in the consolidated statements of financial condition at fair value. We are exposed to credit risk in the event of non-performance by counterparties to derivative instruments. In the event of default by a counterparty, we would be subject to an economic loss that corresponds to the cost to replace the agreement. We control the credit risk associated with our derivative instruments by dealing only with counterparties with the highest credit ratings, establishing counterparty exposure limits and monitoring procedures. Additionally, in connection with our mortgage banking activities, we have commitments to fund loans held-for-sale and commitments to sell loans which are considered derivative instruments. Commitments to sell loans totaled $42.9 million at December 31, 2005 and represent obligations to sell loans either servicing retained or servicing released on a mandatory delivery or best efforts basis. We enter into commitments to sell loans as an economic hedge against our pipeline of fixed rate loans which we originate primarily for sale into the secondary market. The fair values of our mortgage banking derivative instruments are immaterial to our financial condition and results of operations. The following table details our contractual obligations at December 31, 2005.
Payments due by period ------------------------------------------------------------ Less than One to Three to More than (In Thousands) Total One Year Three Years Five Years Five Years - ------------------------------------------------------------------------------------------------------------------------- Contractual Obligations: Borrowings with original terms greater than three months $7,122,866 $ 1,424,000 $ 4,520,000 $ 300,000 $ 878,866 Minimum rental payments due under non-cancelable operating leases 74,800 7,267 13,628 10,142 43,763 Commitments to originate and purchase loans (1) 497,644 497,644 - - - Commitments to fund unused lines of credit (2) 432,528 432,528 - - - - ------------------------------------------------------------------------------------------------------------------------- Total $8,127,838 $ 2,361,439 $ 4,533,628 $ 310,142 $ 922,629 =========================================================================================================================
(1) Commitments to originate and purchase loans include commitments to originate loans held-for-sale. (2) Unused lines of credit relate primarily to home equity lines of credit. 46 In addition to the contractual obligations previously discussed, we have contingent liabilities related to assets sold with recourse and standby letters of credit. We are obligated under various recourse provisions associated with certain first mortgage loans we sold in the secondary market. The principal balance of loans sold with recourse amounted to $596.7 million at December 31, 2005. We estimate the liability for loans sold with recourse based on an analysis of our loss experience related to similar loans sold with recourse. The carrying amount of this liability was immaterial at December 31, 2005. We also have a collateralized repurchase obligation due to the sale of certain long-term fixed rate municipal revenue bonds to an investment trust fund for proceeds that approximated par value. The trust fund has a put option that requires us to repurchase the securities for specified amounts prior to maturity under certain specified circumstances, as defined in the agreement. The outstanding option balance on the agreement totaled $23.0 million at December 31, 2005. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The guarantees generally extend for a term of up to one year and are fully collateralized. For each guarantee issued, if the customer defaults on a payment to the third party, we would have to perform under the guarantee. Outstanding standby letters of credit totaled $4.6 million at December 31, 2005. See Note 1, Note 10 and Note 11 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data," for additional information regarding our commitments, contingent liabilities and derivative instruments. Comparison of Financial Condition and Operating Results for the Years Ended December 31, 2005 and 2004 Financial Condition Total assets decreased $1.04 billion to $22.38 billion at December 31, 2005, from $23.42 billion at December 31, 2004. The primary reason for the decrease in total assets was a decrease in securities, partially offset by an increase in loans receivable. Mortgage loans, net, increased $1.13 billion to $13.88 billion at December 31, 2005, from $12.75 billion at December 31, 2004. This increase was due to increases in each of our mortgage loan portfolios. Gross mortgage loans originated and purchased during the year ended December 31, 2005 totaled $4.32 billion, of which $3.45 billion were originations and $874.5 million were purchases. This compares to gross mortgage loans originated and purchased during the year ended December 31, 2004 totaling $4.35 billion, of which $3.19 billion were originations and $1.16 billion were purchases. Total mortgage loans originated include originations of loans held-for-sale totaling $361.5 million during the year ended December 31, 2005 and $323.2 million during the year ended December 31, 2004. Mortgage loan repayments decreased to $2.82 billion for the year ended December 31, 2005, from $3.52 billion for the year ended December 31, 2004, which reflects the lower levels of refinance activity previously discussed. Our mortgage loan portfolio, as well as our originations and purchases, continue to consist primarily of one-to-four family mortgage loans. Our one-to-four family mortgage loans increased $703.2 million to $9.76 billion at December 31, 2005, from $9.05 billion at December 31, 2004, and represented 68.2% of our total loan portfolio at December 31, 2005. The lower levels of loan prepayments and continued strength of the purchase mortgage market resulted in continued one-to-four family mortgage loan portfolio growth, which began in the 2004 fourth quarter. Our multi-family mortgage loan portfolio increased $267.9 million to $2.83 billion at December 31, 2005, from $2.56 billion at December 31, 2004. Our commercial real estate loan portfolio increased $131.1 million to $1.08 billion at December 31, 2005, from $944.9 million at December 31, 2004. These increases were the result of continued strong origination volume, coupled with reduced prepayment activity. Multi-family and commercial real estate loan originations totaled $952.9 million for the year ended December 31, 2005 and $1.05 billion for the year ended December 31, 2004. The average loan balance within our combined multi-family and commercial real estate portfolio continues to be less than 47 $1.0 million and the average loan-to-value ratio, based on current principal balance and original appraised value, continues to be less than 65%. Securities decreased $2.14 billion to $6.57 billion at December 31, 2005, from $8.71 billion at December 31, 2004. This decrease was primarily the result of principal payments received of $2.28 billion, slightly offset by purchases during the 2005 first quarter totaling $177.6 million, and reflects our previously discussed strategy of reducing the securities and borrowings portfolios through normal cash flow in the current interest rate environment. Our securities portfolio is comprised primarily of fixed rate REMIC and CMO securities. The amortized cost of our fixed rate REMICs and CMOs totaled $6.40 billion at December 31, 2005 and had a weighted average current coupon of 4.30%, a weighted average collateral coupon of 5.75% and a weighted average life of 3.9 years. Deposits increased $487.2 million to $12.81 billion at December 31, 2005, from $12.32 billion at December 31, 2004, primarily due to increases in certificates of deposit and Liquid CDs, partially offset by decreases in savings and money market accounts. Certificates of deposit increased $613.1 million to $7.46 billion at December 31, 2005, from $6.85 billion at December 31, 2004. Our new Liquid CDs totaled $619.8 million at December 31, 2005. Our certificates of deposit and Liquid CDs increased primarily as a result of the continued success of our marketing campaigns previously discussed. We continue to experience intense competition for deposits. Savings accounts decreased $418.2 million since December 31, 2004 to $2.51 billion at December 31, 2005. Money market accounts decreased $316.6 million since December 31, 2004 to $648.7 million at December 31, 2005. Total borrowings, net, decreased $1.53 billion to $7.94 billion at December 31, 2005, from $9.47 billion at December 31, 2004, primarily due to decreases in reverse repurchase agreements and FHLB-NY advances. The net decrease in total borrowings reflects our previously discussed strategy of reducing the securities and borrowings portfolios. Stockholders' equity decreased to $1.35 billion at December 31, 2005, from $1.37 billion at December 31, 2004. The decrease in stockholders' equity was the result of common stock repurchased of $180.9 million, dividends declared of $81.2 million and an increase in accumulated other comprehensive loss, net of tax, of $20.9 million, which was primarily due to the net decrease in the fair value of our securities available-for-sale. These decreases were partially offset by net income of $233.8 million, the effect of stock options exercised and the acceleration of vesting of stock options and related tax benefit of $20.5 million and amortization relating to the earned portion of restricted stock and the allocation of shares held by the employee stock ownership plan, or ESOP, of $9.3 million. Results of Operations General Net income for the year ended December 31, 2005 increased $14.3 million to $233.8 million, from $219.5 million for the year ended December 31, 2004. Diluted earnings per common share increased to $2.26 per share for the year ended December 31, 2005, from $2.00 per share for the year ended December 31, 2004. Return on average assets increased to 1.02% for the year ended December 31, 2005, from 0.97% for the year ended December 31, 2004. Return on average stockholders' equity increased to 17.06% for the year ended December 31, 2005, from 15.81% for the year ended December 31, 2004. Return on average tangible stockholders' equity, which represents average stockholders' equity less average goodwill, increased to 19.72% for the year ended December 31, 2005, from 18.25% for the year ended December 31, 2004. The increases in the returns on average assets, average stockholders' equity and average tangible stockholders' equity for the year ended December 31, 2005, compared to the year ended December 31, 2004, were primarily due to the increase in net income. As previously discussed, our results of operations for the year ended December 31, 2005 include $1.9 million, before tax ($1.3 million after tax), in charges related to the outsourcing of our mortgage loan servicing activities and other company-wide cost saving initiatives. 48 Our results of operations for the year ended December 31, 2004 include a $16.5 million, before tax ($9.6 million after tax), other-than-temporary impairment write-down charge on $120.0 million face value of perpetual preferred stock issued by FHLMC. This charge reduced diluted earnings per common share by $0.09 per share for the year ended December 31, 2004. This charge also reduced our return on average assets by 4 basis points, return on average stockholders' equity by 69 basis points, and return on average tangible stockholders' equity by 79 basis points for the year ended December 31, 2004. For a further discussion of the other-than-temporary impairment write-down, see "Critical Accounting Policies - Securities Impairment." Net Interest Income Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid. Our net interest income is significantly impacted by changes in interest rates and market yield curves and their related impact on cash flows. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," for further discussion of the potential impact of changes in interest rates on our results of operations. For the year ended December 31, 2005, net interest income increased $8.2 million to $478.8 million, from $470.6 million for the year ended December 31, 2004. The increase in net interest income for the year ended December 31, 2005 was the result of an increase in interest income, partially offset by an increase in interest expense. The increase in interest income was primarily due to an increase in the average balance of mortgage loans, coupled with a decrease in net premium amortization on our mortgage-backed securities and mortgage loan portfolios. Net premium amortization on our mortgage-backed securities and mortgage loan portfolios decreased $14.9 million to $17.1 million for the year ended December 31, 2005, from $32.0 million for the year ended December 31, 2004. The decrease in net premium amortization was primarily due to the lower repayment levels during 2005 as compared to 2004, as well as the reduced amount of unamortized premium remaining in our mortgage-backed securities portfolio. The increase in interest expense was primarily due to increases in the average balances of our certificates of deposit and our new Liquid CDs, partially offset by the decrease in the average balance of borrowings. The net interest margin increased to 2.19% for the year ended December 31, 2005, from 2.17% for the year ended December 31, 2004. The net interest rate spread increased to 2.11% for the year ended December 31, 2005, from 2.09% for the year ended December 31, 2004. The increases in the net interest margin and net interest rate spread were primarily due to the increase in the average yield on interest-earning assets, resulting primarily from the decrease in net premium amortization on our mortgage-backed securities and mortgage loan portfolios, previously discussed. The average balance of net interest-earning assets increased slightly to $666.4 million for the year ended December 31, 2005, from $665.7 million for the year ended December 31, 2004. The changes in average interest-earning assets and interest-bearing liabilities and their related yields and costs are discussed in greater detail under "Interest Income" and "Interest Expense." 49 Analysis of Net Interest Income The following table sets forth certain information about the average balances of our assets and liabilities and their related yields and costs for the years ended December 31, 2005, 2004 and 2003. Average yields are derived by dividing income by the average balance of the related assets and average costs are derived by dividing expense by the average balance of the related liabilities, for the periods shown. Average balances are derived from average daily balances. The yields and costs include amortization of fees, costs, premiums and discounts which are considered adjustments to interest rates.
For the Year Ended December 31, --------------------------------------------------------------------------------------------------- 2005 2004 2003 --------------------------------------------------------------------------------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ (Dollars in Thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost - ------------------------------------------------------------------------------------------------------------------------------------ Assets: Interest-earning assets: Mortgage loans (1): One-to-four family $ 9,461,023 $ 459,929 4.86% $ 8,894,219 $ 428,229 4.81% $ 8,990,636 $ 466,544 5.19% Multi-family, commercial real estate and construction 3,862,281 239,119 6.19 3,419,369 220,703 6.45 2,757,481 203,785 7.39 Consumer and other loans (1) 526,071 31,160 5.92 478,195 21,312 4.46 410,095 19,247 4.69 ----------- --------- ----------- --------- ----------- --------- Total loans 13,849,375 730,208 5.27 12,791,783 670,244 5.24 12,158,212 689,576 5.67 Mortgage-backed and other securities (2) 7,671,532 340,626 4.44 8,608,601 371,044 4.31 8,752,167 355,564 4.06 Federal funds sold and repurchase agreements 195,863 6,123 3.13 86,625 1,140 1.32 136,272 1,538 1.13 FHLB-NY stock 130,759 6,030 4.61 171,419 3,473 2.03 268,533 10,613 3.95 ----------- --------- ----------- --------- ----------- --------- Total interest-earning assets 21,847,529 1,082,987 4.96 21,658,428 1,045,901 4.83 21,315,184 1,057,291 4.96 --------- --------- --------- Goodwill 185,151 185,151 185,151 Other non-interest-earning assets 852,475 848,106 1,176,908 ----------- ----------- ----------- Total assets $22,885,155 $22,691,685 $22,677,243 =========== =========== =========== Liabilities and stockholders' equity: Interest-bearing liabilities: Savings $ 2,742,417 11,015 0.40 $ 2,973,054 11,920 0.40 $ 2,907,541 13,198 0.45 Money market 804,855 7,513 0.93 1,088,915 6,379 0.59 1,403,363 9,934 0.71 NOW and demand deposit 1,569,419 928 0.06 1,534,822 921 0.06 1,469,805 1,526 0.10 Liquid CDs 350,923 10,708 3.05 - - - - - - ----------- --------- ----------- --------- ----------- --------- Total core deposits 5,467,614 30,164 0.55 5,596,791 19,220 0.34 5,780,709 24,658 0.43 Certificates of deposit 7,146,664 251,235 3.52 6,211,014 218,209 3.51 5,419,725 200,593 3.70 ----------- --------- ----------- --------- ----------- --------- Total deposits 12,614,278 281,399 2.23 11,807,805 237,429 2.01 11,200,434 225,251 2.01 Borrowings 8,566,812 322,808 3.77 9,184,928 337,906 3.68 9,690,325 452,502 4.67 ----------- --------- ----------- --------- ----------- --------- Total interest-bearing liabilities 21,181,090 604,207 2.85 20,992,733 575,335 2.74 20,890,759 677,753 3.24 --------- --------- --------- Non-interest-bearing liabilities 333,522 310,662 302,391 ----------- ---------- ----------- Total liabilities 21,514,612 21,303,395 21,193,150 Stockholders' equity 1,370,543 1,388,290 1,484,093 ----------- ----------- ----------- Total liabilities and stockholders' equity $22,885,155 $22,691,685 $22,677,243 =========== =========== =========== Net interest income/net interest rate spread (3) $ 478,780 2.11% $ 470,566 2.09% $ 379,538 1.72% ========= ==== ========= ==== ========= ==== Net interest-earning assets/ net interest margin (4) $ 666,439 2.19% $ 665,695 2.17% $ 424,425 1.78% =========== ==== =========== ==== =========== ==== Ratio of interest-earning assets to interest-bearing liabilities 1.03x 1.03x 1.02x ===== ===== =====
(1) Mortgage loans and consumer and other loans include loans held-for-sale and non-performing loans and exclude the allowance for loan losses. (2) Securities available-for-sale are reported at average amortized cost. (3) Net interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average interest-earning assets. 50 Rate/Volume Analysis The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to (1) the changes attributable to changes in volume (changes in volume multiplied by prior rate), (2) the changes attributable to changes in rate (changes in rate multiplied by prior volume), and (3) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Year Ended December 31, 2005 Year Ended December 31, 2004 Compared to Compared to Year Ended December 31, 2004 Year Ended December 31, 2003 --------------------------------- --------------------------------- Increase (Decrease) Increase (Decrease) --------------------------------- --------------------------------- (In Thousands) Volume Rate Net Volume Rate Net - -------------------------------------------------------------------------------------------------------------- Interest-earning assets: Mortgage loans: One-to-four family $ 27,254 $ 4,446 $ 31,700 $ (4,895) $ (33,420) $ (38,315) Multi-family, commercial real estate and construction 27,606 (9,190) 18,416 44,943 (28,025) 16,918 Consumer and other loans 2,306 7,542 9,848 3,050 (985) 2,065 Mortgage-backed and other securities (41,344) 10,926 (30,418) (5,949) 21,429 15,480 Federal funds sold and repurchase agreements 2,387 2,596 4,983 (627) 229 (398) FHLB-NY stock (989) 3,546 2,557 (3,046) (4,094) (7,140) - -------------------------------------------------------------------------------------------------------------- Total 17,220 19,866 37,086 33,476 (44,866) (11,390) - -------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings (905) - (905) 275 (1,553) (1,278) Money market (1,954) 3,088 1,134 (2,027) (1,528) (3,555) NOW and demand deposit 7 - 7 57 (662) (605) Liquid CDs 10,708 - 10,708 - - - Certificates of deposit 32,413 613 33,026 28,268 (10,652) 17,616 Borrowings (23,200) 8,102 (15,098) (22,627) (91,969) (114,596) - -------------------------------------------------------------------------------------------------------------- Total 17,069 11,803 28,872 3,946 (106,364) (102,418) - -------------------------------------------------------------------------------------------------------------- Net change in net interest income $ 151 $ 8,063 $ 8,214 $ 29,530 $ 61,498 $ 91,028 ==============================================================================================================
Interest Income Interest income for the year ended December 31, 2005 increased $37.1 million to $1.08 billion, from $1.05 billion for the year ended December 31, 2004. This increase was primarily the result of an increase in the average yield on interest-earning assets to 4.96% for the year ended December 31, 2005, from 4.83% for the year ended December 31, 2004, coupled with an increase in the average balance of interest-earning assets to $21.85 billion for the year ended December 31, 2005, from $21.66 billion for the year ended December 31, 2004. The increase in the average yield on interest-earning assets was primarily the result of the decrease in net premium amortization on our mortgage-backed securities and mortgage loan portfolios, previously discussed, coupled with rising interest rates. The increase in the average balance of interest-earning assets was primarily due to increases in the average balances of loans and federal funds sold and repurchase agreements, partially offset by decreases in the average balances of mortgage-backed and other securities and FHLB-NY stock. Interest income on one-to-four family mortgage loans increased $31.7 million to $459.9 million for the year ended December 31, 2005, from $428.2 million for the year ended December 31, 2004, which was primarily the result of an increase of $566.8 million in the average balance of such loans, coupled with an increase in the average yield to 4.86% for the year ended December 31, 2005, from 4.81% for the year ended December 31, 2004. The increase in the average balance of one-to-four family mortgage loans is the result of the strong levels of originations and purchases which have outpaced the levels of repayments over 51 the past year. The increase in the average yield on one-to-four family mortgage loans is primarily due to the decrease in net premium amortization, previously discussed. Interest income on multi-family, commercial real estate and construction loans increased $18.4 million to $239.1 million for the year ended December 31, 2005, from $220.7 million for the year ended December 31, 2004, which was primarily the result of an increase of $442.9 million in the average balance of such loans, partially offset by a decrease in the average yield to 6.19% for the year ended December 31, 2005, from 6.45% for the year ended December 31, 2004. The increase in the average balance of multi-family, commercial real estate and construction loans reflects the continued strong levels of originations, which have outpaced the levels of repayments. Repayment activity within this portfolio is generally not as significant as our one-to-four family mortgage loan portfolio in part due to the prepayment penalties associated with these loans. The decrease in the average yield on multi-family, commercial real estate and construction loans reflects the significant growth in the portfolio in the relatively low interest rate environment. Interest income on consumer and other loans increased $9.9 million to $31.2 million for the year ended December 31, 2005, from $21.3 million for the year ended December 31, 2004, primarily due to an increase in the average yield to 5.92% for the year ended December 31, 2005, from 4.46% for the year ended December 31, 2004, coupled with an increase of $47.9 million in the average balance of the portfolio. The increase in the average yield on consumer and other loans was primarily the result of an increase in the average yield on our home equity lines of credit which are adjustable rate loans which generally reset monthly and are indexed to the prime rate. The prime rate increased 125 basis points during the latter half of 2004 and 200 basis points during 2005. The increase in the average balance of consumer and other loans was due to the increase in home equity lines of credit during the year as a result of the continued strong housing market and relatively low interest rate environment. Home equity lines of credit represented 91.6% of this portfolio at December 31, 2005. Interest income on mortgage-backed and other securities decreased $30.4 million to $340.6 million for the year ended December 31, 2005, from $371.0 million for the year ended December 31, 2004. This decrease was primarily the result of a decrease of $937.1 million in the average balance of the portfolio, partially offset by an increase in the average yield to 4.44% for the year ended December 31, 2005, from 4.31% for the year ended December 31, 2004. The decrease in the average balance of mortgage-backed and other securities reflects our previously discussed strategy of reducing the securities and borrowings portfolios. The increase in the average yield on mortgage-backed and other securities reflects the previously discussed reduction in net premium amortization. Premium amortization and discount accretion on mortgage-backed and other securities changed by $9.5 million to net discount accretion of $1.4 million for the year ended December 31, 2005, from net premium amortization of $8.1 million for the year ended December 31, 2004. Interest income on federal funds sold and repurchase agreements increased $5.0 million to $6.1 million for the year ended December 31, 2005, as a result of an increase in the average yield to 3.13% for the year ended December 31, 2005, from 1.32% for the year ended December 31, 2004, coupled with an increase of $109.2 million in the average balance of the portfolio. The increase in the average yield reflects the FOMC federal funds rate increases totaling 125 basis points during the latter half of 2004 and 200 basis points during 2005. Dividend income on FHLB-NY stock increased $2.6 million to $6.0 million for the year ended December 31, 2005, primarily as a result of increases in the dividend rates paid by the FHLB-NY. Interest Expense Interest expense for the year ended December 31, 2005 increased $28.9 million to $604.2 million, from $575.3 million for the year ended December 31, 2004. This increase was primarily the result of an increase of $188.4 million in the average balance of interest-bearing liabilities to $21.18 billion for the year ended December 31, 2005, from $20.99 billion for the year ended December 31, 2004, coupled with an increase in the average cost of total interest-bearing liabilities to 2.85% for the year ended December 31, 2005, from 2.74% for the year ended December 31, 2004. The increase in the average balance of interest-bearing liabilities was due to an increase in the average balance of deposits, partially offset by a decrease in the average balance of borrowings. The increase in the average cost of total interest-bearing liabilities was 52 primarily due to the impact of the significant increases in the average balances of certificates of deposit and Liquid CDs, which have a higher average cost than our other deposit products, and the impact of the increase in short-term interest rates, which began in the latter half of 2004, on our short-term borrowings. Interest expense on deposits increased $44.0 million to $281.4 million for the year ended December 31, 2005, from $237.4 million for the year ended December 31, 2004, primarily due to an increase of $806.5 million in the average balance of total deposits. The increase in the average balance of total deposits was primarily the result of increases in the average balances of certificates of deposit and Liquid CDs, partially offset by decreases in the average balances of money market and savings accounts, primarily as a result of continued intense competition for these types of deposits. The average cost of total deposits increased to 2.23% for the year ended December 31, 2005, from 2.01% for the year ended December 31, 2004, primarily due to the previously discussed significant increases in the average balances of certificates of deposit and Liquid CDs. Interest expense on certificates of deposit increased $33.0 million to $251.2 million for the year ended December 31, 2005, from $218.2 million for the year ended December 31, 2004, primarily due to an increase of $935.7 million in the average balance. The average cost of certificates of deposit increased slightly to 3.52% for the year ended December 31, 2005, from 3.51% for the year ended December 31, 2004. During the year ended December 31, 2005, $3.70 billion of certificates of deposit, with a weighted average rate of 2.71% and a weighted average maturity at inception of seventeen months, matured and $4.06 billion of certificates of deposit were issued or repriced, with a weighted average rate of 3.45% and a weighted average maturity at inception of thirteen months. Interest expense on Liquid CDs totaled $10.7 million for the year ended December 31, 2005. Our new Liquid CDs had an average balance of $350.9 million and an average cost of 3.05% for the year ended December 31, 2005. The increases in the average balances of certificates of deposit and Liquid CDs were primarily a result of the success of our marketing campaigns which have focused on attracting these types of deposits. Growth in our certificates of deposit and Liquid CDs contributes to the management of interest rate risk, enables us to reduce our borrowing levels and continues to produce new customers from our communities, creating relationship development opportunities. Interest expense on borrowings for the year ended December 31, 2005 decreased $15.1 million to $322.8 million, from $337.9 million for the year ended December 31, 2004, resulting from a decrease of $618.1 million in the average balance, partially offset by an increase in the average cost to 3.77% for the year ended December 31, 2005, from 3.68% for the year ended December 31, 2004. The decrease in the average balance of borrowings was primarily the result of our previously discussed strategy of reducing the securities and borrowings portfolios. The increase in the average cost of borrowings reflects the impact of the increase in short-term interest rates over the past year on our short-term borrowings. Provision for Loan Losses During the years ended December 31, 2005 and 2004, no provision for loan losses was recorded. We review our allowance for loan losses on a quarterly basis. Our 2005 analyses did not indicate that a change in our allowance for loan losses was warranted. Our net charge-off experience during the year ended December 31, 2005 was one basis point of average loans outstanding, compared to less than one basis point of average loans outstanding for the year ended December 31, 2004. We believe our current allowance for loan losses is adequate to reflect the risks inherent in our loan portfolio. The allowance for loan losses totaled $81.2 million at December 31, 2005 and $82.8 million at December 31, 2004. Net loan charge-offs totaled $1.6 million for the year ended December 31, 2005 compared to $363,000 for the year ended December 31, 2004. Non-performing loans increased $32.4 million to $65.0 million at December 31, 2005, from $32.6 million at December 31, 2004. The allowance for loan losses as a percentage of non-performing loans decreased to 124.81% at December 31, 2005, from 254.02% at December 31, 2004, primarily due to the increase in non-performing loans from December 31, 2004 to December 31, 2005. The allowance for loan losses as a percentage of total loans was 0.56% at December 31, 2005 and 0.62% at December 31, 2004. For further discussion of non-performing loans and the allowance for loan losses, see "Critical Accounting Policies" and "Asset Quality." 53 Non-Interest Income Non-interest income for the year ended December 31, 2005 increased $22.1 million to $102.2 million, from $80.1 million for the year ended December 31, 2004. This increase was primarily due to the $16.5 million other-than-temporary impairment write-down of securities charge recorded in the 2004 fourth quarter, previously discussed under "Critical Accounting Policies - Securities Impairment," coupled with increases in customer service fees, other non-interest income and mortgage banking income, net, for the year ended December 31, 2005. These increases were partially offset by the absence of gains on sales of securities for the year ended December 31, 2005. Customer service fees increased $7.8 million to $66.3 million for the year ended December 31, 2005, from $58.5 million for the year ended December 31, 2004. The increase was primarily due to an increase in insufficient fund fees related to transaction accounts resulting from the implementation of an enhanced overdraft protection program in the 2005 first quarter. Other non-interest income increased $1.7 million to $8.5 million for the year ended December 31, 2005, from $6.8 million for the year ended December 31, 2004, primarily due to gains recognized in the 2005 second quarter in a trust account previously established for certain former directors, a gain recognized in the 2005 second quarter on the sale of an inactive subsidiary and a gain recognized in the 2005 fourth quarter on the settlement of an insurance claim related to the fire at our Oakdale banking office in December 2004. Mortgage banking income, net, which includes loan servicing fees, net gain on sales of loans, amortization of MSR and valuation allowance adjustments for the impairment of MSR, increased $1.3 million to $6.0 million for the year ended December 31, 2005, from $4.7 million for the year ended December 31, 2004. This increase was primarily due to a decrease in amortization of MSR attributable to the reduction in the level of mortgage loan repayments. There were no sales of securities during the year ended December 31, 2005. During 2004, we sold securities with an amortized cost of $165.5 million for a net gain of $4.7 million. Non-Interest Expense Non-interest expense increased $3.7 million to $228.7 million for the year ended December 31, 2005, from $225.0 million for the year ended December 31, 2004. This increase was primarily due to increases in advertising expense and other expense. Advertising expense increased $2.2 million to $8.8 million for the year ended December 31, 2005, from $6.6 million for the year ended December 31, 2004, primarily due to increased advertising related to, among other things, the introduction of a business banking marketing campaign in the 2005 first quarter. Other expense increased $1.6 million to $35.0 million for the year ended December 31, 2005, from $33.4 million for the year ended December 31, 2004, primarily due to, among other things, increased legal fees and other costs in the first half of 2005 as a result of the completion of the trial phase of the LISB goodwill litigation, various one-time charges of $581,000 associated with the outsourcing of our mortgage servicing and other company-wide cost saving initiatives, previously discussed, an increase in recruiting expenses and increased charitable contributions. See Item 3, "Legal Proceedings," for further discussion of goodwill litigation. The increase in charitable contributions was the result of contributions to benefit the Gulf Coast victims of Hurricane Katrina and to support the tsunami disaster relief efforts in South Asia. These increases were partially offset by a $3.2 million arbitration award settlement in the 2004 third quarter. Compensation and benefits expense increased slightly for the year ended December 31, 2005, compared to the year ended December 31, 2004, primarily due to costs of $1.3 million associated with the outsourcing of our mortgage loan servicing activities and other company-wide cost saving initiatives, previously discussed. Compensation and benefits expense also includes certain stock-based compensation costs in 2005. In December 2005, 196,828 shares of restricted stock were granted to select officers with a fair value of $29.02 per share on the grant date. Compensation cost related to restricted stock grants is recognized on a 54 straight line basis over the vesting period of approximately three years. Also in December 2005, we accelerated the vesting of certain outstanding unvested stock options in anticipation of our adoption of revised SFAS No. 123, "Share-Based Payment," or SFAS No. 123(R), effective January 1, 2006. Compensation costs related to the acceleration of vesting totaled $111,000 in 2005. See "Impact of Accounting Standards and Interpretations" for a further discussion of the accelerated vesting and the impact of our adoption of SFAS No. 123(R). Our percentage of general and administrative expense to average assets was 1.00% for the year ended December 31, 2005, compared to 0.99% for the year ended December 31, 2004. Our efficiency ratio, which represents general and administrative expense divided by the sum of net interest income plus non-interest income, decreased to 39.37% for the year ended December 31, 2005, from 40.86% for the year ended December 31, 2004, primarily due to the previously discussed increases in non-interest income and net interest income. Income Tax Expense For the year ended December 31, 2005, income tax expense totaled $118.4 million, representing an effective tax rate of 33.6%, compared to $106.1 million, representing an effective tax rate of 32.6%, for the year ended December 31, 2004. Comparison of Financial Condition and Operating Results for the Years Ended December 31, 2004 and 2003 Financial Condition Total assets increased $954.3 million to $23.42 billion at December 31, 2004, from $22.46 billion at December 31, 2003. The primary reasons for the increase in total assets were the increases in loans receivable and mortgage-backed securities. This growth was funded primarily through an increase in deposits. Mortgage loans, net, increased $497.4 million to $12.75 billion at December 31, 2004, from $12.25 billion at December 31, 2003. This increase was primarily due to an increase in our multi-family mortgage loan portfolio. Gross mortgage loans originated and purchased during the year ended December 31, 2004 totaled $4.35 billion, of which $3.19 billion were originations and $1.16 billion were purchases. This compares to gross mortgage loans originated and purchased during the year ended December 31, 2003 totaling $7.29 billion, of which $5.75 billion were originations and $1.54 billion were purchases. Total mortgage loans originated include originations of loans held-for-sale totaling $323.2 million during the year ended December 31, 2004 and $613.3 million during the year ended December 31, 2003. Mortgage loan repayments decreased to $3.52 billion for the year ended December 31, 2004, from $6.11 billion for the year ended December 31, 2003. The decreases in the levels of mortgage loan originations, purchases and repayments reflect the decline in refinance activity in 2004 compared to 2003. Our mortgage loan portfolio, as well as our originations and purchases, continue to consist primarily of one-to-four family mortgage loans. During 2004, the reduction in repayment activity and continued strong loan origination volume, primarily in the fourth quarter, resulted in a modest increase in our one-to-four family loan portfolio from December 31, 2003. Our one-to-four family mortgage loans increased $83.7 million to $9.05 billion at December 31, 2004, from $8.97 billion at December 31, 2003, and represented 68.7% of our total loan portfolio at December 31, 2004. The strong growth we experienced in the fourth quarter of 2004 offset the impact of repayments outpacing originations during the first nine months of 2004. While we continue to be primarily a one-to-four family mortgage lender, we have increased our emphasis on multi-family and commercial real estate loan originations over the past several years. Our multi-family mortgage loan portfolio increased $328.5 million to $2.56 billion at December 31, 2004, from $2.23 billion at December 31, 2003. Our commercial real estate loan portfolio increased $64.6 million to $944.9 million at December 31, 2004, from $880.3 million at December 31, 2003. Multi-family and commercial real estate loan originations totaled $1.05 billion for the year ended December 31, 2004 and $1.65 billion for the 55 year ended December 31, 2003. As of December 31, 2004, the average loan balance within our combined multi-family and commercial real estate portfolio continues to be less than $1.0 million and the average loan-to-value ratio, based on current principal balance and original appraised value, continues to be less than 65%. Prepayment activity within our multi-family and commercial real estate loan portfolio is generally not as significant as that which we have experienced in our one-to-four family mortgage loan portfolio due in part to the prepayment penalties associated with these loans. Consumer and other loans, net, increased $78.9 million to $517.1 million at December 31, 2004, from $438.2 million at December 31, 2003. This increase is primarily in home equity lines of credit as a result of the continued strong housing market and low interest rate environment. Securities increased $262.1 million to $8.71 billion at December 31, 2004, from $8.45 billion at December 31, 2003. This increase was primarily the result of purchases of fixed rate REMICs and CMOs totaling $3.07 billion, partially offset by principal payments received of $2.65 billion, sales of $165.5 million and the $16.5 million other-than-temporary impairment write-down on our FHLMC perpetual preferred securities, previously discussed. During 2004, we continued to purchase mortgage-backed securities to effectively redeploy our securities and excess mortgage cash flows in addition to cash flows from deposit growth. At December 31, 2004, our securities portfolio is comprised primarily of fixed rate REMIC and CMO securities. The amortized cost of our fixed rate REMICs and CMOs totaled $8.44 billion at December 31, 2004. Included in this total is $1.49 billion of securities which have a remaining gross premium of $12.2 million, a weighted average current coupon of 4.94%, a weighted average collateral coupon of 6.00% and a weighted average life of 2.2 years. The remaining $6.95 billion of these securities have a remaining gross discount of $25.8 million, a weighted average current coupon of 4.20%, a weighted average collateral coupon of 5.73% and a weighted average life of 3.3 years. Included in the totals for discount securities are $819.8 million of securities at par. Deposits increased $1.13 billion to $12.32 billion at December 31, 2004, from $11.19 billion at December 31, 2003. The increase in deposits was primarily due to an increase of $1.35 billion in certificates of deposit to $6.85 billion at December 31, 2004 and an increase of $87.3 million in NOW and demand deposit accounts to $1.58 billion at December 31, 2004, partially offset by a decrease of $267.5 million in our money market accounts to $965.3 million at December 31, 2004. The increase in our certificates of deposit was primarily the result of the success of our marketing campaigns. The decrease in our money market accounts is attributable to continued intense competition for these accounts. Certain local competitors have continued to offer premium rates for money market and checking accounts. We have not offered premium rates on these accounts because we do not consider it a cost effective strategy. However, despite continued intense competition for checking accounts, we have been successful in increasing our total NOW and demand deposit account balances during the year ended December 31, 2004, including our business checking deposits, due in large part to our concerted sales and marketing efforts, including our PEAK sales process. Total borrowings, net, decreased $162.2 million to $9.47 billion at December 31, 2004, from $9.63 billion at December 31, 2003. This decrease is primarily the result of a $155.0 million decrease in reverse repurchase agreements. The net decrease in total borrowings reflects the repayment of certain high cost borrowings that matured. Stockholders' equity decreased to $1.37 billion at December 31, 2004, from $1.40 billion at December 31, 2003. The decrease in stockholders' equity was the result of common stock repurchased of $225.1 million and dividends declared of $72.0 million. These decreases were partially offset by net income of $219.5 million, the effect of stock options exercised and related tax benefit of $24.1 million, a decrease in accumulated other comprehensive loss, net of tax, of $17.9 million, which was primarily due to the increase in the fair value of our securities available-for-sale, and the amortization of the allocated portion of shares held by the ESOP of $8.7 million. 56 Results of Operations General Net income for the year ended December 31, 2004 increased $22.7 million to $219.5 million, from $196.8 million for the year ended December 31, 2003. Diluted earnings per common share totaled $2.00 per share for the year ended December 31, 2004 and $1.66 per share for the year ended December 31, 2003. Return on average assets increased to 0.97% for the year ended December 31, 2004, from 0.87% for the year ended December 31, 2003. Return on average stockholders' equity increased to 15.81% for the year ended December 31, 2004, from 13.26% for the year ended December 31, 2003. Return on average tangible stockholders' equity increased to 18.25% for the year ended December 31, 2004, from 15.15% for the year ended December 31, 2003. The increase in the return on average assets is primarily due to the increase in net income. The increase in the returns on average stockholders' equity and average tangible stockholders' equity is primarily due to the increase in net income, coupled with the decrease in the average balance of stockholders' equity for the year ended December 31, 2004, compared to the year ended December 31, 2003. As previously discussed, our results of operations for the year ended December 31, 2004 include a $16.5 million, before-tax ($9.6 million, after-tax), other-than-temporary impairment write-down charge on $120.0 million face value of perpetual preferred stock issued by FHLMC. This charge reduced diluted earnings per common share by $0.09 per share for the year ended December 31, 2004. This charge also reduced our return on average assets by 4 basis points, return on average stockholders' equity by 69 basis points, and return on average tangible stockholders' equity by 79 basis points. For a further discussion of the other-than-temporary impairment write-down, see "Critical Accounting Policies - Securities Impairment." Net Interest Income For the year ended December 31, 2004, net interest income increased $91.1 million to $470.6 million, from $379.5 million for the year ended December 31, 2003. The net interest margin increased to 2.17% for the year ended December 31, 2004, from 1.78% for the year ended December 31, 2003. The increases in net interest income and the net interest margin for the year ended December 31, 2004 were primarily the result of a decrease in interest expense, partially offset by a decrease in interest income. The decrease in interest expense was attributable to a decrease in our cost of funds, which is primarily due to the repayment and refinancing of various higher cost borrowings. The decrease in interest income was primarily due to the decrease in the yield on interest-earning assets as a result of the extraordinarily high level of mortgage loan and mortgage-backed securities repayments we experienced throughout 2003 resulting in reinvestment in assets at lower rates. Partially offsetting the negative impact of the reinvestment in assets at lower rates was an increase in the average balance of total interest-earning assets and a reduction in net premium amortization on mortgage-backed securities and mortgage loans. Net premium amortization on our mortgage-backed securities and mortgage loan portfolios decreased $81.0 million to $32.0 million for the year ended December 31, 2004, from $113.0 million for the year ended December 31, 2003. The average balance of net interest-earning assets increased $241.3 million to $665.7 million for the year ended December 31, 2004, from $424.4 million for the year ended December 31, 2003. The increase in the average balance of net interest-earning assets was primarily the result of an increase of $343.2 million in the average balance of total interest-earning assets to $21.66 billion for the year ended December 31, 2004, from $21.32 billion for the year ended December 31, 2003, partially offset by an increase of $102.0 million in the average balance of total interest-bearing liabilities to $20.99 billion for the year ended December 31, 2004, from $20.89 billion for the year ended December 31, 2003. Also contributing to the increase in the average balance of net interest-earning assets was the decrease in non-interest-earning assets, primarily as a result of the reduction in the monthly mortgage-backed securities principal payments receivable due to the reduction in the mortgage-backed securities cash flow. The net interest rate spread increased to 2.09% for the year ended December 31, 2004, from 1.72% for the year ended December 31, 2003, primarily due to a decrease in the average cost of interest-bearing liabilities, partially offset by a decrease in the average yield on interest-earning assets. The average cost of interest-bearing liabilities decreased to 2.74% for the year 57 ended December 31, 2004, from 3.24% for the year ended December 31, 2003. The average yield on interest-earning assets decreased to 4.83% for the year ended December 31, 2004, from 4.96% for the year ended December 31, 2003. The changes in average interest-earning assets and interest-bearing liabilities and their related yields and costs are discussed in greater detail under "Interest Income" and "Interest Expense." Interest Income Interest income for the year ended December 31, 2004 decreased slightly to $1.05 billion, from $1.06 billion for the year ended December 31, 2003. This decrease was primarily the result of a decrease in the average yield on interest-earning assets to 4.83% for the year ended December 31, 2004, from 4.96% for the year ended December 31, 2003, substantially offset by an increase of $343.2 million in the average balance of interest-earning assets to $21.66 billion for the year ended December 31, 2004, from $21.32 billion for the year ended December 31, 2003. The decrease in the average yield on interest-earning assets was primarily due to decreases in the average yields on mortgage loans, partially offset by an increase in the average yield on mortgage-backed and other securities. The decreases in the average yields on our mortgage loan portfolios are attributable to a reduction in coupon rates resulting from the extraordinarily high levels of repayments in these portfolios, primarily during 2003, resulting in reinvestment in those assets at lower rates, coupled with the significant growth in the multi-family, commercial real estate and construction loan portfolio in a relatively low interest rate environment. Partially offsetting this decrease in coupon rates was the significant decrease in net premium amortization as a result of the reduction in refinance activity in 2004. The increase in the average yield on mortgage-backed and other securities was primarily the result of the significant decrease in net premium amortization as a result of the reduction in refinance activity in 2004, as well as the reduced amount of unamortized premium remaining in our portfolio, partially offset by a reduction in coupon rates. The increase in the average balance of interest-earning assets was primarily due to increases in the average balances of multi-family, commercial real estate and construction loans and consumer and other loans, partially offset by decreases in the average balances of mortgage-backed and other securities, one-to-four family mortgage loans, and federal funds sold and repurchase agreements. Interest income on one-to-four family mortgage loans decreased $38.3 million to $428.2 million for the year ended December 31, 2004, from $466.5 million for the year ended December 31, 2003, which was the result of a decrease in the average yield to 4.81% for the year ended December 31, 2004, from 5.19% for the year ended December 31, 2003, coupled with a decrease of $96.4 million in the average balance of such loans. The decrease in the average yield on one-to-four family mortgage loans reflects the impact of the low interest rate environment as higher rate loans were repaid and replaced with lower yielding new originations and purchases throughout most of 2003. However, the yield has been positively impacted by a reduction of mortgage loan premium amortization as a result of the decreased refinance activity during 2004 as compared to 2003. The decrease in the average balance of one-to-four family mortgage loans is the result of repayments continuing to outpace originations and purchases of one-to-four family mortgage loans during the first nine months of 2004. However, as a result of reduced prepayment activity and continued strong purchase mortgage activity, during the 2004 fourth quarter, originations and purchases exceeded the levels of repayments resulting in a modest increase in the balance of the portfolio from December 31, 2003 to December 31, 2004. Interest income on multi-family, commercial real estate and construction loans increased $16.9 million to $220.7 million for the year ended December 31, 2004, from $203.8 million for the year ended December 31, 2003, which was primarily the result of an increase of $661.9 million in the average balance of such loans, partially offset by a decrease in the average yield to 6.45% for the year ended December 31, 2004, from 7.39% for the year ended December 31, 2003. The increase in the average balance of multi-family, commercial real estate and construction loans reflects our increased emphasis on originations of such loans over the past several years, coupled with the fact that repayment activity within this portfolio is generally not as significant as that which we have experienced on our one-to-four family mortgage loan portfolio in part due to the prepayment penalties associated with these loans. The decrease in the average yield on multi-family, commercial real estate and construction loans reflects the significant growth in this portfolio 58 in the relatively low interest rate environment, coupled with a decrease of $3.4 million in prepayment penalties which totaled $12.6 million in 2004 compared to $16.0 million in 2003. Interest income on mortgage-backed and other securities increased $15.4 million to $371.0 million for the year ended December 31, 2004, from $355.6 million for the year ended December 31, 2003. This increase was the result of an increase in the average yield to 4.31% for the year ended December 31, 2004, from 4.06% for the year ended December 31, 2003, partially offset by a decrease of $143.6 million in the average balance of the portfolio. The increase in the average yield on mortgage-backed and other securities reflects the reduction in net premium amortization during 2004. Net premium amortization decreased $60.5 million to $8.1 million for the year ended December 31, 2004, from $68.6 million for the year ended December 31, 2003. The benefit from the reduction in the amount of net premium amortization was partially offset by a reduction in coupon rates resulting from the substantial turnover we experienced in our mortgage-backed securities portfolio during 2003 as higher yielding securities paid off and were replaced with lower yielding securities. In 2004, we continued to purchase mortgage-backed securities to effectively redeploy our securities and excess mortgage cash flows, in addition to cash flows from deposit growth, which resulted in an increase in the balance of mortgage-backed and other securities at December 31, 2004, compared to December 31, 2003. The decrease in the average balance of mortgage-backed and other securities for the year ended December 31, 2004, compared to the year ended December 31, 2003, is the result of the volatility in cash flows we experienced in 2004 on our mortgage-backed securities portfolio, due to the interest rate volatility which occurred between quarters in 2004, coupled with a reduction in the levels of other securities as a result of securities which were sold or called in 2003 and early 2004. Dividends on FHLB-NY stock totaled $3.5 million for the year ended December 31, 2004 and $10.6 million for the year ended December 31, 2003. The decrease in dividends received was primarily due to a decrease in the dividend rates paid by the FHLB-NY, coupled with a decrease in the average balance of FHLB-NY stock, reflecting the reduction in the level of FHLB-NY borrowings. The FHLB-NY suspended dividend payments in the 2003 fourth quarter but resumed payments in January 2004 at a reduced rate from that which they had paid prior to the suspension. Interest Expense Interest expense for the year ended December 31, 2004 decreased $102.5 million to $575.3 million, from $677.8 million for the year ended December 31, 2003. This decrease was primarily the result of a decrease in the average cost of interest-bearing liabilities to 2.74% for the year ended December 31, 2004, from 3.24% for the year ended December 31, 2003, slightly offset by an increase of $102.0 million in the average balance of interest-bearing liabilities to $20.99 billion for the year ended December 31, 2004, from $20.89 billion for the year ended December 31, 2003. The decrease in the overall average cost of our interest-bearing liabilities primarily reflects the impact of the repayment and refinancing of higher cost borrowings as they matured at substantially lower rates. The slight increase in the average balance of interest-bearing liabilities was primarily due to an increase in the average balance of deposits, substantially offset by a decrease in the average balance of borrowings. Interest expense on deposits increased $12.1 million to $237.4 million for the year ended December 31, 2004, from $225.3 million for the year ended December 31, 2003, reflecting an increase of $607.4 million in the average balance of total deposits which was primarily due to an increase in the average balance of certificates of deposit, partially offset by a decrease in the average balance of money market accounts. The average cost of deposits in each of the deposit categories decreased for the year ended December 31, 2004, as compared to the year ended December 31, 2003, as a result of the low interest rate environment. However, our overall average cost of deposits remained at 2.01% for the year ended December 31, 2004, primarily due to the significant increase in the average balance of certificates of deposit which have a higher average cost than our other deposit products. Interest expense on certificates of deposit increased $17.6 million resulting from an increase of $791.3 million in the average balance, partially offset by a decrease in the average cost to 3.51% for the year ended December 31, 2004, from 3.70% for the year ended December 31, 2003. The increase in the average balance of certificates of deposit was primarily the result of the success of our marketing campaigns which 59 have focused on attracting medium- and long-term certificates of deposit as part of our interest rate risk management strategy to extend liabilities as well as to enable us to reduce borrowings. During the year ended December 31, 2004, $3.90 billion of certificates of deposit, with a weighted average rate of 2.45% and a weighted average maturity at inception of sixteen months, matured and $5.02 billion of certificates of deposit were issued or repriced, with a weighted average rate of 2.66% and a weighted average maturity at inception of twenty months. Interest expense on money market accounts decreased $3.6 million reflecting a decrease of $314.4 million in the average balance, coupled with a decrease in the average cost to 0.59% for the year ended December 31, 2004, from 0.71% for the year ended December 31, 2003. The decrease in the average balance of money market accounts is attributable to the continued intense competition for these accounts, previously discussed. The decrease in the average cost of money market accounts is a result of the low interest rate environment. Interest expense on savings accounts decreased $1.3 million which was attributable to a decrease in the average cost to 0.40% for the year ended December 31, 2004, from 0.45% for the year ended December 31, 2003, partially offset by an increase of $65.5 million in the average balance. Interest expense on NOW and demand deposit accounts decreased $605,000 as a result of a decrease in the average cost to 0.06% for the year ended December 31, 2004, from 0.10% for the year ended December 31, 2003, slightly offset by an increase of $65.0 million in the average balance of these accounts. The increases in the average balances of savings and NOW and demand deposit accounts are consistent with our emphasis on core deposit generation. Interest expense on borrowings decreased $114.6 million to $337.9 million for the year ended December 31, 2004, from $452.5 million for year ended December 31, 2003, resulting from a decrease in the average cost of borrowings to 3.68% for the year ended December 31, 2004, from 4.67% for the year ended December 31, 2003, coupled with a decrease of $505.4 million in the average balance. The decrease in the average cost of borrowings is the result of the repayment of certain higher cost borrowings as they matured and the refinancing of the remainder at substantially lower rates. The decrease in the average balance of borrowings was primarily the result of the repayment of certain higher cost borrowings as they matured, primarily through the increase in certificates of deposits as a result of the success of our marketing campaigns, previously discussed. Provision for Loan Losses During the years ended December 31, 2004 and 2003, no provision for loan losses was recorded. We review our allowance for loan losses on a quarterly basis. Our 2004 analyses did not indicate that a change in our allowance for loan losses was warranted. Our net charge-off experience during the year ended December 31, 2004 remained at an annualized rate of less than one basis point of average loans outstanding for the period. We believe our current allowance for loan losses is adequate to reflect the risks inherent in our loan portfolio. The allowance for loan losses totaled $82.8 million at December 31, 2004 and $83.1 million at December 31, 2003. Net loan charge-offs totaled $363,000 for the year ended December 31, 2004 compared to $425,000 for the year ended December 31, 2003. Non-performing loans increased $2.9 million to $32.6 million at December 31, 2004, from $29.7 million at December 31, 2003. The allowance for loan losses as a percentage of non-performing loans decreased to 254.02% at December 31, 2004, from 280.10% at December 31, 2003, primarily due to the increase in non-performing loans from December 31, 2003 to December 31, 2004. The allowance for loan losses as a percentage of total loans decreased to 0.62% at December 31, 2004, from 0.66% at December 31, 2003. For further discussion of non-performing loans and the allowance for loan losses, see "Critical Accounting Policies" and "Asset Quality." Non-Interest Income Non-interest income for the year ended December 31, 2004 decreased $39.5 million to $80.1 million, from $119.6 million for the year ended December 31, 2003. All components of non-interest income for the year 60 ended December 31, 2004 decreased as compared to the year ended December 31, 2003. However, the decrease in total non-interest income was primarily due to the $16.5 million other-than-temporary impairment write-down of securities, previously discussed, and the decreases in mortgage banking income, net, and other non-interest income. Mortgage banking income, net, decreased $5.6 million to $4.7 million for the year ended December 31, 2004, from $10.3 million for the year ended December 31, 2003. This decrease was primarily due to decreases in net gain on sales of loans and loan servicing fees, partially offset by a decrease in amortization of MSR. Net gain on sales of loans decreased $8.6 million to $3.5 million for the year ended December 31, 2004, from $12.1 million for the year ended December 31, 2003. The decrease in net gain on sales of loans was primarily due to a significant decrease in the volume of fixed rate loans originated and sold into the secondary market during 2004, coupled with less favorable pricing opportunities during the year ended December 31, 2004, as compared to the year ended December 31, 2003. Loan servicing fees decreased $2.1 million to $5.8 million for the year ended December 31, 2004, from $7.9 million for the year ended December 31, 2003, primarily as a result of the decrease in the balance of loans serviced for others to $1.67 billion at December 31, 2004, from $1.90 billion at December 31, 2003. The decrease in the balance of loans serviced for others was the result of repayments in that portfolio exceeding the level of new servicing volume from loan sales. Amortization of MSR decreased $6.0 million to $6.8 million for the year ended December 31, 2004, from $12.8 million for the year ended December 31, 2003. The decrease in MSR amortization is attributable to the reduction in the level of mortgage loan repayments as a result of the decrease in mortgage loan refinance activity previously discussed. We recorded a recovery in the valuation allowance of MSR of $2.2 million for the year ended December 31, 2004 compared to a recovery of $3.1 million for the year ended December 31, 2003. Other non-interest income decreased $7.7 million to $6.8 million for the year ended December 31, 2004, from $14.5 million for the year ended December 31, 2003, primarily due to a $10.1 million gain on the sale of our interest in a joint venture real estate investment held by one of our wholly-owned subsidiaries in the 2003 fourth quarter, partially offset by income in 2004 from an investment in a limited partnership. Net gain on sales of securities decreased $2.6 million to $4.7 million for the year ended December 31, 2004, from $7.3 million for the year ended December 31, 2003. During 2004, we sold mortgage-backed securities with an amortized cost of $145.2 million and other securities with an amortized cost of $20.3 million. During 2003, we sold mortgage-backed securities with an amortized cost of $1.40 billion and other securities with an amortized cost of $45.6 million. Net gains on sales of securities are used as a natural hedge to offset MSR valuation allowance adjustments. Income from BOLI decreased $2.9 million to $17.1 million for the year ended December 31, 2004, from $20.0 million for the year ended December 31, 2003, primarily due to a reduction in the yield on the BOLI investment as a result of the low interest rate environment. Other loan fees decreased $2.8 million to $4.8 million for the year ended December 31, 2004, from $7.6 million for the year ended December 31, 2003, primarily due to decreases in mortgage related fees due to the decrease in loan origination and refinance activity previously discussed. Non-Interest Expense Non-interest expense increased $19.1 million to $225.0 million for the year ended December 31, 2004, from $205.9 million for the year ended December 31, 2003. This increase was primarily due to increases in compensation and benefits expense, occupancy, equipment and systems expense and other expense. Compensation and benefits expense increased $8.4 million to $118.7 million for the year ended December 31, 2004, from $110.3 million for the year ended December 31, 2003. This increase was primarily attributable to increases in salary expense and ESOP expense, partially offset by a reduction in pension expense. The increase in salary expense was primarily attributable to an increase in corporate bonuses for 2004 compared to 2003. No bonuses were paid to executive management for 2003. The increase in ESOP expense was primarily attributable to a higher average market value of our common stock during the year ended December 31, 2004 compared to the year ended December 31, 2003. Pension expense decreased 61 primarily due to the increase in the expected return on plan assets in 2004 compared to 2003 as a result of the increase in the fair value of plan assets from December 31, 2002 to December 31, 2003. Occupancy, equipment and systems expense increased $4.7 million to $64.6 million for the year ended December 31, 2004, from $59.9 million for the year ended December 31, 2003. This increase was primarily due to increased furniture, fixtures and computer equipment expense and computer equipment depreciation, as a result of systems enhancements over the past two years, and an increase in office building expense, resulting from increased maintenance costs, primarily snow removal costs in the 2004 first quarter due to the harsh winter. Other expense increased $5.5 million to $33.4 million for the year ended December 31, 2004, from $27.9 million for the year ended December 31, 2003, primarily due to a $3.2 million arbitration settlement resulting from the final disposition of a compensation dispute between us and three former directors of Long Island Bancorp, Inc. and increased legal fees and other costs as a result of increased activity in preparation for the trial phase of the LISB goodwill litigation. See Item 3, "Legal Proceedings," for further discussion of the LISB goodwill litigation. Additionally, we incurred $800,000 in consulting fees related to our implementation of the Sarbanes-Oxley Act of 2002. Although non-interest expense increased in 2004, we continue to focus on expense control, with expense ratios that are significantly lower than our peer averages. Our percentage of general and administrative expense to average assets increased to 0.99% for the year ended December 31, 2004, from 0.91% for the year ended December 31, 2003, primarily due to the increase in general and administrative expense. The efficiency ratio decreased to 40.86% for the year ended December 31, 2004, from 41.25% for the year ended December 31, 2003, primarily due to the increase in net interest income. Income Tax Expense For the year ended December 31, 2004, income tax expense totaled $106.1 million, representing an effective tax rate of 32.6%, compared to $96.4 million, representing an effective tax rate of 32.9%, for the year ended December 31, 2003. Asset Quality Non-performing assets increased $32.6 million to $66.1 million at December 31, 2005, from $33.5 million at December 31, 2004. Non-performing loans, the most significant component of non-performing assets, increased $32.4 million to $65.0 million at December 31, 2005, from $32.6 million at December 31, 2004. These increases were primarily due to increases in non-performing multi-family and one-to-four family mortgage loans. The increase in non-performing multi-family mortgage loans is primarily attributable to two large loans to unrelated borrowers. The first is a $5.4 million loan involving fraud. We have notified the applicable title insurance company of the existence of this fraud. They are defending our interest subject to a reservation of rights. The second is a $5.3 million loan where the borrower has become delinquent as a result of a large increase in his real estate taxes. The increase in non-performing one-to-four family mortgage loans is partially the result of an $11.5 million increase in loans which are classified as non-performing although they have only missed two payments, as previously discussed. At December 31, 2005, non-performing multi-family loans totaled $26.3 million and had an average loan-to-value ratio of 69.1% and an average debt service coverage ratio of 1.77 times. At December 31, 2005, non-performing one-to-four family mortgage loans totaled $35.7 million and had an average loan-to-value ratio of 64.9%. Loan-to-value ratios are based on current principal balance and original appraised value. While our non-performing loans at December 31, 2005 have increased from December 31, 2004, our non-performing loans continue to remain at low levels in relation to the size of our loan portfolio. The ratio of non-performing loans to total loans increased to 0.45% at December 31, 2005, from 0.25% at December 31, 2004. Our ratio of non-performing assets to total assets increased to 0.30% at December 31, 2005, from 0.14% at December 31, 2004. We have not experienced an increase in non-performing assets or delinquent loans as a result of the hurricanes in the Gulf Coast region of the United States during the latter half of 2005. See Item 1, "Business" for further discussion of our asset quality. 62 Non-Performing Assets The following table sets forth information regarding non-performing assets.
At December 31, ------------------------------------------------------ (Dollars in Thousands) 2005 2004 2003 2002 2001 - -------------------------------------------------------------------------------------------------------- Non-accrual delinquent mortgage loans (1) $ 64,351 $ 31,462 $ 28,321 $ 31,997 $ 34,848 Non-accrual delinquent consumer and other loans 500 544 792 1,485 991 Mortgage loans delinquent 90 days or more and still accruing interest (2) 176 573 563 1,035 1,277 - -------------------------------------------------------------------------------------------------------- Total non-performing loans 65,027 32,579 29,676 34,517 37,116 Real estate owned, net (3) 1,066 920 1,635 1,091 2,987 - -------------------------------------------------------------------------------------------------------- Total non-performing assets $ 66,093 $ 33,499 $ 31,311 $ 35,608 $ 40,103 ======================================================================================================== Non-performing loans to total loans 0.45% 0.25% 0.23% 0.29% 0.31% Non-performing loans to total assets 0.29 0.14 0.13 0.16 0.16 Non-performing assets to total assets 0.30 0.14 0.14 0.16 0.18
(1) Includes multi-family and commercial real estate loans totaling $28.6 million, $11.5 million, $6.1 million, $2.9 million and $3.6 million at December 31, 2005, 2004, 2003, 2002 and 2001, respectively. (2) Loans delinquent 90 days or more and still accruing interest consist solely of loans delinquent 90 days or more as to their maturity date but not their interest due. (3) Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is recorded at the lower of cost or fair value, less estimated selling costs. If all non-accrual loans had been performing in accordance with their original terms, we would have recorded interest income, with respect to such loans, of $3.8 million for the year ended December 31, 2005, $1.8 million for the year ended December 31, 2004 and $1.9 million for the year ended December 31, 2003. This compares to actual payments recorded as interest income, with respect to such loans, of $2.4 million for the year ended December 31, 2005, $1.0 million for the year ended December 31, 2004 and $1.2 million for the year ended December 31, 2003. As previously discussed, we discontinue accruing interest on mortgage loans when such loans become 90 days delinquent as to their interest due, even though in some instances the borrower has only missed two payments. As of December 31, 2005, $28.1 million of mortgage loans classified as non-performing had missed only two payments, compared to $12.3 million at December 31, 2004. Excluded from non-performing assets are restructured loans that have complied with the terms of their restructure agreement for a satisfactory period and have, therefore, been returned to performing status. Restructured loans that are in compliance with their restructured terms totaled $1.6 million at December 31, 2005, $2.8 million at December 31, 2004, $3.9 million at December 31, 2003, $5.0 million at December 31, 2002 and $5.4 million at December 31, 2001. In addition to non-performing assets, we had $813,000 of potential problem loans at December 31, 2005 compared to $4.1 million at December 31, 2004. Such loans are 60-89 days delinquent as shown in the following table. 63 Delinquent Loans The following table shows a comparison of delinquent loans at December 31, 2005, 2004 and 2003. Principal Balance of Loans Past Due ---------------------------------------- 60-89 Days 90 Days or More ---------------------------------------- Number Number (Dollars in Thousands) of Loans Amount of Loans Amount - ----------------------------------------------------------------------------- At December 31, 2005: Mortgage loans: One-to-four family 6 $ 174 152 $ 35,727 Multi-family 1 101 26 26,256 Commercial real estate - - 6 2,544 Consumer and other loans 47 538 47 500 - ----------------------------------------------------------------------------- Total delinquent loans 54 $ 813 231 $ 65,027 ============================================================================= Delinquent loans to total loans 0.01% 0.45% At December 31, 2004: Mortgage loans: One-to-four family 6 $ 805 98 $ 20,497 Multi-family 4 460 12 8,843 Commercial real estate - - 4 2,695 Construction 2 1,994 - - Consumer and other loans 56 880 57 544 - ----------------------------------------------------------------------------- Total delinquent loans 68 $ 4,139 171 $ 32,579 ============================================================================= Delinquent loans to total loans 0.03% 0.25% At December 31, 2003: Mortgage loans: One-to-four family 5 $ 192 143 $ 22,744 Multi-family 1 60 10 3,448 Commercial real estate - - 4 2,692 Consumer and other loans 83 587 90 792 - ----------------------------------------------------------------------------- Total delinquent loans 89 $ 839 247 $ 29,676 ============================================================================= Delinquent loans to total loans 0.01% 0.23% Classified Assets The following table sets forth the carrying value of our assets, exclusive of general valuation allowances, classified as special mention, substandard or doubtful at December 31, 2005. There were no assets classified as loss at December 31, 2005.
Special Mention Substandard Doubtful ------------------- ------------------- ------------------- Number Number Number (Dollars in Thousands) of Loans Amount of Loans Amount of Loans Amount - ---------------------------------------------------------------------------------------------- Loans: Mortgage loans: One-to-four family - $ - 155 $ 35,749 4 $ 252 Multi-family 9 19,307 27 23,013 1 5,357 Commercial real estate 1 1,140 4 1,383 1 1,012 Construction 3 1,501 - - - - Consumer and other loans - - 47 500 - - - ---------------------------------------------------------------------------------------------- Total loans 13 21,948 233 60,645 6 6,621 Real estate owned: One-to-four family - - 5 1,066 - - - ---------------------------------------------------------------------------------------------- Total classified assets 13 $ 21,948 238 $ 61,711 6 $ 6,621 ==============================================================================================
64 Allowance for Losses The following table sets forth changes in our allowances for losses on loans and REO for the periods indicated.
At or For the Year Ended December 31, ----------------------------------------------------- (Dollars in Thousands) 2005 2004 2003 2002 2001 - --------------------------------------------------------------------------------------------------------- Allowance for losses on loans: Balance at beginning of year $ 82,758 $ 83,121 $ 83,546 $ 82,285 $ 79,931 Provision charged to operations - - - 2,307 4,028 Charge-offs: One-to-four family (749) (231) (194) (325) (506) Multi-family - - - (83) (3) Commercial real estate (650) - - (268) (464) Construction - - - (281) - Consumer and other loans (706) (656) (1,142) (1,251) (1,554) - --------------------------------------------------------------------------------------------------------- Total charge-offs (2,105) (887) (1,336) (2,208) (2,527) - --------------------------------------------------------------------------------------------------------- Recoveries: One-to-four family 140 78 111 241 263 Multi-family 34 - - 83 - Commercial real estate - - 20 291 - Construction - - - - 9 Consumer and other loans 332 446 780 547 581 - --------------------------------------------------------------------------------------------------------- Total recoveries 506 524 911 1,162 853 - --------------------------------------------------------------------------------------------------------- Net charge-offs (1,599) (363) (425) (1,046) (1,674) - --------------------------------------------------------------------------------------------------------- Balance at end of year $ 81,159 $ 82,758 $ 83,121 $ 83,546 $ 82,285 ========================================================================================================= Net charge-offs to average loans outstanding 0.01% 0.00% 0.00% 0.01% 0.01% Allowance for loan losses to total loans 0.56 0.62 0.66 0.69 0.68 Allowance for loan losses to non-performing loans 124.81 254.02 280.10 242.04 221.70 Allowance for losses on REO: Balance at beginning of year $ - $ - $ 4 $ - $ 3 Provision (recovery) recorded to operations 56 - 4 4 (64) Charge-offs (56) - (8) - (17) Recoveries - - - - 78 - --------------------------------------------------------------------------------------------------------- Balance at end of year $ - $ - $ - $ 4 $ - =========================================================================================================
The following table sets forth our allocation of the allowance for loan losses by loan category and the percent of loans in each category to total loans receivable at the dates indicated. The portion of the allowance for loan losses allocated to each loan category does not represent the total available to absorb losses which may occur within the loan category, since the total allowance is available for losses applicable to the entire loan portfolio.
At December 31, ------------------------------------------------------------------------- 2005 2004 2003 ------------------------------------------------------------------------- % of Loans % of Loans % of Loans to to to (Dollars in Thousands) Amount Total Loans Amount Total Loans Amount Total Loans - ----------------------------------------------------------------------------------------------------------- One-to-four family $ 34,051 68.24% $ 36,697 68.68% $ 39,614 71.13% Multi-family 19,818 19.77 18,124 19.41 16,440 17.69 Commercial real estate 11,437 7.52 11,785 7.17 11,006 6.98 Construction 2,071 0.96 1,996 0.89 1,695 0.79 Consumer and other loans 13,782 3.51 14,156 3.85 14,366 3.41 - ----------------------------------------------------------------------------------------------------------- Total allowance for loan losses $ 81,159 100.00% $ 82,758 100.00% $ 83,121 100.00% ===========================================================================================================
At December 31, ------------------------------------------------ 2002 2001 ------------------------------------------------ % of Loans % of Loans to to (Dollars in Thousands) Amount Total Loans Amount Total Loans - ---------------------------------------------------------------------------------- One-to-four family $ 45,485 76.86% $ 49,122 83.59% Multi-family 12,449 13.35 8,612 9.05 Commercial real estate 10,099 6.21 8,529 4.95 Construction 786 0.47 1,329 0.42 Consumer and other loans 14,727 3.11 14,693 1.99 - ---------------------------------------------------------------------------------- Total allowance for loan losses $ 83,546 100.00% $ 82,285 100.00% ==================================================================================
65 Impact of Accounting Standards and Interpretations In November 2005, the FASB issued FSP No. 115-1, which addresses the determination of when an investment is considered impaired, whether the impairment is other-than-temporary and how to measure an impairment loss. FSP No. 115-1 also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP No. 115-1 replaces the impairment guidance in Emerging Issues Task Force Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," with references to existing authoritative literature concerning other-than-temporary impairment determinations (principally SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and SEC Staff Accounting Bulletin No. 59, "Accounting for Noncurrent Marketable Equity Securities"). Under FSP No. 115-1, impairment losses must be recognized in earnings for the difference between the security's cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. FSP No. 115-1 also requires that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. FSP No. 115-1 is effective for reporting periods beginning after December 15, 2005. We do not expect our application of FSP No. 115-1 to have a material impact on our financial condition or results of operations. In December 2004, the FASB issued SFAS No. 123(R) which requires public entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). The fair-value-based method in SFAS No. 123(R) is similar to the fair-value-based method in SFAS No. 123 in most respects. SFAS No. 123(R) applies to all awards granted after the required effective date and to awards modified, repurchased or cancelled after that date. Additionally, beginning on the required effective date, public entities will recognize compensation cost for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures. The cumulative effect of initially applying SFAS No. 123(R), if any, is recognized as of the required effective date. For periods before the required effective date, public entities may elect, although they are not required, to retroactively restate financial statements for prior periods to recognize compensation cost on a basis consistent with the pro forma disclosures required for those periods by SFAS No. 123. SFAS No. 123(R) is effective as of the beginning of the first annual reporting period beginning after June 15, 2005. Our adoption of SFAS No. 123(R), effective January 1, 2006, is expected to reduce our 2006 net income by approximately $1.1 million with respect to our December 2005 option grants and approximately $160,000 with respect to option grants to directors made in January 2006. Additional equity grants that may be made in 2006 will also result in compensation expense. On December 22, 2005, in anticipation of our adoption of SFAS No. 123(R), we accelerated the vesting of all outstanding unvested options which were granted to employees on December 17, 2003 and December 15, 2004. We recognized pre-tax compensation expense in 2005 of $111,000 as a result of the accelerated vesting of these options. The purpose of the acceleration was to eliminate compensation expense associated with these options in future periods upon our adoption of SFAS No. 123(R). The accelerated vesting eliminates pre-tax compensation expense of approximately $10.4 million which would have been recognized in future periods, including approximately $6.7 million in 2006. Shares acquired through the exercise of the accelerated options may not be sold prior to the earlier of the date the optionee terminates employment with us or the original vesting date. A number of the options which were accelerated were intended to qualify as incentive stock options when granted. The accelerated vesting disqualified most of such options from incentive stock option tax treatment. Upon the optionees' exercise of such disqualified options, we may realize certain tax benefits that would not have otherwise been available. See Note 1 and Note 16 of Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," for additional disclosures regarding the impact of our adoption of SFAS No. 123(R). 66 Impact of Inflation and Changing Prices The consolidated financial statements and notes thereto presented herein have been prepared in accordance with GAAP, which require the measurement of our financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or, to the same extent, as the price of goods and services. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a financial institution, the primary component of our market risk is IRR. Net interest income is the primary component of our net income. Net interest income is the difference between the interest earned on our loans, securities and other interest-earning assets and the interest expense incurred on our deposits and borrowings. The yields, costs, and volumes of loans, securities, deposits and borrowings are directly affected by the levels of and changes in market interest rates. Additionally, changes in interest rates also affect the related cash flows of our assets and liabilities as the option to prepay assets or withdraw liabilities remains with our customers, in most cases without penalty. The objective of our IRR management policy is to maintain an appropriate mix and level of assets, liabilities and off-balance sheet items to enable us to meet our growth and/or earnings objectives, while maintaining specified minimum capital levels as required by the OTS, in the case of Astoria Federal, and as established by our Board of Directors. We use a variety of analyses to monitor, control and adjust our asset and liability positions, primarily interest rate sensitivity gap analysis, or gap analysis, and net interest income sensitivity, or NII sensitivity, analysis. Additional IRR modeling is done by Astoria Federal in conformity with OTS requirements. In conjunction with performing these analyses we also consider related factors including, but not limited to, our overall credit profile, non-interest income and non-interest expense. We do not enter into financial transactions or hold financial instruments for trading purposes. Gap Analysis Gap analysis measures the difference between the amount of interest-earning assets anticipated to mature or reprice within specific time periods and the amount of interest-bearing liabilities anticipated to mature or reprice within the same time periods. The following table, referred to as the Gap Table, sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2005 that we anticipate will reprice or mature in each of the future time periods shown using certain assumptions based on our historical experience and other market-based data available to us. The actual duration of mortgage loans and mortgage-backed securities can be significantly impacted by changes in mortgage prepayment activity. The major factors affecting mortgage prepayment rates are prevailing interest rates and related mortgage refinancing opportunities. Prepayment rates will also vary due to a number of other factors, including the regional economy in the area where the underlying collateral is located, seasonal factors, demographic variables and the assumability of the underlying mortgages. The Gap Table does not indicate the impact of general interest rate movements on our net interest income because the actual repricing dates of various assets and liabilities will differ from our estimates and it does not give consideration to the yields and costs of the assets and liabilities or the projected yields and costs to replace or retain those assets and liabilities. Callable features of certain assets and liabilities, in addition to the foregoing, may also cause actual experience to vary from that indicated. The uncertainty and volatility of interest rates, economic conditions and other markets which affect the value of these call options, as well as the financial condition and strategies of the holders of the options, increase the difficulty and uncertainty in predicting when the call options may be exercised. Among the factors considered in our estimates are current trends and historical repricing experience with respect to similar products. As a result, different assumptions may be used at different points in time. 67 The Gap Table includes $2.18 billion of callable borrowings classified according to their maturity dates, in the more than one year to three years category, which are callable within one year and at various times thereafter. In addition, the Gap Table includes callable securities with an amortized cost of $107.8 million classified according to their maturity dates, which are callable within one year and at various times thereafter. The classifications of callable borrowings and securities are consistent with our experience with these instruments in the current interest rate environment. As indicated in the Gap Table, our one-year cumulative gap at December 31, 2005 was negative 6.79%. This compares to a one-year cumulative gap of negative 2.87% at December 31, 2004. The change in our one-year cumulative gap is primarily attributable to the increase in our certificates of deposit, including our Liquid CDs, as a result of the success of our various certificate of deposit campaigns throughout 2005 and 2004, partially offset by a decrease in our short-term borrowings.
At December 31, 2005 ------------------------------------------------------------------------ More than More than One Year Three Years One Year to to More than (Dollars in Thousands) or Less Three Years Five Years Five Years Total - ----------------------------------------------------------------------------------------------------------------- Interest-earning assets: Mortgage loans (1) $ 4,281,541 $ 5,130,348 $ 3,980,822 $ 363,059 $ 13,755,770 Consumer and other loans (1) 469,535 21,987 11,489 - 503,011 Repurchase agreements 182,803 - - - 182,803 Securities available-for-sale 418,554 677,356 601,047 232,393 1,929,350 Securities held-to-maturity 1,442,630 2,014,629 1,273,991 7,570 4,738,820 FHLB-NY stock - - - 145,247 145,247 - ----------------------------------------------------------------------------------------------------------------- Total interest-earning assets 6,795,063 7,844,320 5,867,349 748,269 21,255,001 Net unamortized purchase premiums and deferred costs (2) 27,263 28,323 22,335 1,903 79,824 - ----------------------------------------------------------------------------------------------------------------- Net interest-earning assets (3) 6,822,326 7,872,643 5,889,684 750,172 21,334,825 - ----------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings 116,785 233,572 233,572 1,926,968 2,510,897 Money market 514,198 30,750 30,750 73,032 648,730 NOW and demand deposit 79,175 158,348 158,348 1,173,988 1,569,859 Liquid CDs 619,784 - - - 619,784 Certificates of deposit 4,267,619 2,549,492 613,812 30,262 7,461,185 Borrowings, net (4) 2,743,285 4,518,722 299,066 378,215 7,939,288 - ----------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 8,340,846 7,490,884 1,335,548 3,582,465 20,749,743 - ----------------------------------------------------------------------------------------------------------------- Interest sensitivity gap (1,518,520) 381,759 4,554,136 (2,832,293) $ 585,082 ================================================================================================================= Cumulative interest sensitivity gap $ (1,518,520) $ (1,136,761) $ 3,417,375 $ 585,082 ================================================================================================================= Cumulative interest sensitivity gap as a percentage of total assets (6.79)% (5.08)% 15.27% 2.61% Cumulative net interest-earning assets as a percentage of interest-bearing liabilities 81.79% 92.82% 119.91% 102.82%
(1) Mortgage and consumer and other loans include loans held-for-sale and exclude non-performing loans and the allowance for loan losses. (2) Net unamortized purchase premiums and deferred costs are prorated. (3) Includes securities available-for-sale at amortized cost. (4) Excludes the hedge accounting adjustment on our Junior Subordinated Debentures. NII Sensitivity Analysis In managing IRR, we also use an internal income simulation model for our NII sensitivity analyses. These analyses measure changes in projected net interest income over various time periods resulting from hypothetical changes in interest rates. The interest rate scenarios most commonly analyzed reflect gradual and reasonable changes over a specified time period, which is typically one year. The base net interest income projection utilizes similar assumptions as those reflected in the Gap Table, assumes that cash flows are reinvested in similar assets and liabilities and that interest rates as of the reporting date 68 remain constant over the projection period. For each alternative interest rate scenario, corresponding changes in the cash flow and repricing assumptions of each financial instrument are made to determine the impact on net interest income. Assuming the entire yield curve was to increase 200 basis points, through quarterly parallel increments of 50 basis points and remain at that level thereafter, our projected net interest income for the twelve month period beginning January 1, 2006 would decrease by approximately 5.94% from the base projection. At December 31, 2004, in the up 200 basis point scenario, our projected net interest income for the twelve month period beginning January 1, 2005 would have decreased by approximately 4.50% from the base projection. Assuming the entire yield curve was to decrease 200 basis points, through quarterly parallel decrements of 50 basis points and remain at that level thereafter, our projected net interest income for the twelve month period beginning January 1, 2006 would increase by approximately 2.12% from the base projection. The interest rate environment which existed at December 31, 2004 prevented us from performing an income simulation for a decline in interest rates of the same magnitude and timing as our rising interest rate simulation, since the assumptions which would have been used for a down 200 basis point interest rate scenario related to asset and liability pricing, market yields and customer behavior, given the low level of interest rates, would not have produced reasonable and meaningful results. However, assuming the entire yield curve was to decrease 100 basis points, through quarterly parallel decrements of 25 basis points, and remain at that level thereafter, our projected net interest income for the twelve month period beginning January 1, 2005 would have decreased by approximately 1.12% from the base projection. At December 31, 2005, in the down 100 basis point scenario, our projected net interest income for the twelve month period beginning January 1, 2006 would increase by approximately 1.87% from the base projection. Various shortcomings are inherent in both the Gap Table and NII sensitivity analyses. Certain assumptions may not reflect the manner in which actual yields and costs respond to market changes. Similarly, prepayment estimates and similar assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. Changes in interest rates may also affect our operating environment and operating strategies as well as those of our competitors. In addition, certain adjustable rate assets have limitations on the magnitude of rate changes over specified periods of time. Accordingly, although our NII sensitivity analyses may provide an indication of our IRR exposure, such analyses are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and our actual results will differ. Additionally, certain assets, liabilities and items of income and expense which may be affected by changes in interest rates, albeit to a much lesser degree, and which do not affect net interest income, are excluded from this analysis. These include income from BOLI, changes in the fair value of MSR and the mark-to-market adjustments on certain derivative instruments. With respect to these items alone, and assuming the entire yield curve was to increase 200 basis points, through quarterly parallel increments of 50 basis points and remain at that level thereafter, our projected net income for the twelve month period beginning January 1, 2006 would increase by approximately $4.8 million. Conversely, assuming the entire yield curve was to decrease 200 basis points, through quarterly parallel decrements of 50 basis points, and remain at that level thereafter, our projected net income for the twelve month period beginning January 1, 2006 would decrease by approximately $9.3 million with respect to these items alone. For information regarding our credit risk, see "Asset Quality," in Item 7, "MD&A." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For our Consolidated Financial Statements, see the index on page 76. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 69 ITEM 9A. CONTROLS AND PROCEDURES George L. Engelke, Jr., our Chairman, President and Chief Executive Officer, and Monte N. Redman, our Executive Vice President and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2005. Based upon their evaluation, they each found that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure. Effective December 1, 2005, we outsourced our mortgage loan servicing activities under a sub-servicing agreement with DMI. Under this agreement, DMI services mortgage loans on our behalf, where in the past we performed such activity ourselves. In connection with the outsourcing, we substantially changed our internal controls over financial reporting with respect to our mortgage loan servicing operation. Both prior to and following the transfer of servicing activities to DMI, we assessed the effectiveness of our internal controls over financial reporting related to our mortgage loan servicing operation, as part of our overall assessment of internal controls over financial reporting, and found such controls, both before and after the transfer of servicing activities, to be effective based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. Except as noted in the preceding paragraph, there were no changes in our internal controls over financial reporting that occurred during the three months ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. See page 77 for our Management Report on Internal Control Over Financial Reporting and page 78 for the related Report of Independent Registered Public Accounting Firm. The Sarbanes-Oxley Act Section 302 Certifications regarding the quality of our public disclosures have been filed with the SEC as exhibit 31.1 and exhibit 31.2 to this Annual Report on Form 10-K. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ASTORIA FINANCIAL CORPORATION Information regarding directors and executive officers who are not directors of Astoria Financial Corporation is presented in the tables under the heading "Board Nominees, Directors and Executive Officers" and under the heading "Committees and Meetings of the Board" in our definitive Proxy Statement to be utilized in connection with our Annual Meeting of Shareholders to be held on May 17, 2006, which will be filed with the SEC within 120 days from December 31, 2005, and is incorporated herein by reference. Audit Committee Financial Expert Information regarding the audit committee of our Board of Directors, including information regarding audit committee financial experts serving on the audit committee, is presented under the heading "Committees and Meetings of the Board" in our definitive Proxy Statement to be utilized in connection with our Annual Meeting of Shareholders to be held on May 17, 2006, which will be filed with the SEC within 120 days from December 31, 2005, and is incorporated herein by reference. 70 The Audit Committee Charter is available on our investor relations website at http://ir.astoriafederal.com under the heading "Corporate Governance." In addition, copies of our Audit Committee Charter will be provided to shareholders upon written request to Astoria Financial Corporation, Investor Relations Department, One Astoria Federal Plaza, Lake Success, New York 11042 at no charge. Code of Business Conduct and Ethics We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer and principal financial officer, which is available on our investor relations website at http://ir.astoriafederal.com under the heading "Corporate Governance." In addition, copies of our code of business conduct and ethics will be provided to shareholders upon written request to Astoria Financial Corporation, Investor Relations Department, One Astoria Federal Plaza, Lake Success, New York 11042 at no charge. Corporate Governance Our Corporate Governance Guidelines and Nominating and Corporate Governance Committee Charter are available on our investor relations website at http://ir.astoriafederal.com under the heading "Corporate Governance." In addition, copies of such documents will be provided to shareholders upon written request to Astoria Financial Corporation, Investor Relations Department, One Astoria Federal Plaza, Lake Success, New York 11042 at no charge. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive (and director) compensation is included under the headings "Summary Compensation Table," "Fiscal Year End Option/SAR Values," "Pension Plans," "Director Compensation," "Employment Agreements," "Incentive Option Plans," that portion of the "Report of the Compensation Committee on Executive Compensation" entitled "Long-term Incentive Compensation," and "Compensation Committee Interlocks and Insider Participation" in our definitive Proxy Statement to be utilized in connection with our Annual Meeting of Shareholders to be held on May 17, 2006 which will be filed with the SEC within 120 days from December 31, 2005, and is incorporated herein by reference. The Compensation Committee Charter is available on our investor relations website at http://ir.astoriafederal.com under the heading "Corporate Governance." In addition, copies of our Compensation Committee Charter will be provided to shareholders upon written request to Astoria Financial Corporation, Investor Relations Department, One Astoria Federal Plaza, Lake Success, New York 11042 at no charge. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information relating to security ownership of certain beneficial owners and management is included under the headings "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in our definitive Proxy Statement to be utilized in connection with our Annual Meeting of Shareholders to be held on May 17, 2006, which will be filed with the SEC within 120 days from December 31, 2005, and is incorporated herein by reference. 71 The following chart provides information as of December 31, 2005 with respect to compensation plans, including individual compensation arrangements, under which equity securities of Astoria Financial Corporation are authorized for issuance:
Number of securities to be issued Number of securities upon exercise of Weighted-Average remaining available for outstanding options, exercise price of future issuance under warrants and rights outstanding options, equity compensation plans and vesting of shares of warrants, rights (excluding securities restricted stock and restricted stock (4) reflected in column (a)) Plan Category (1) (a) (b) (c) - ------------------------------- ------------------------ ------------------------ --------------------------- Equity compensation plans approved by security holders (2) 11,325,528 $20.14 3,952,072 Equity compensation plans not approved by security holders - - - - ---------------------------------------------------------------------------------------------------------------------- Total (3) 11,325,528 $20.14 3,952,072 ======================================================================================================================
(1) Excluded is any employee benefit plan that is intended to meet the qualification requirements of Section 401(a) of the Internal Revenue Code, such as the Astoria Federal ESOP and the Astoria Federal Incentive Savings Plan. Also excluded are warrants or rights issuable to all of our security holders as such on a pro rata basis, such as those issuable pursuant to the Rights Agreement between us and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, dated as of July 17, 1996, as amended. The only equity security issuable under the equity compensation plans referenced in the table is our common stock. All equity compensation plans reflected in the table include stock option plans or arrangements which provide for the issuance of our common stock upon the exercise of options. In addition, the 2005 Re-designated, Amended and Restated Stock Incentive Plan for Officers and Employees of Astoria Financial Corporation, or the 2005 Plan, also provides for the grant of equity settled stock appreciation rights and awards of restricted stock or equity settled restricted stock units. Of the number of securities to be issued and the number of securities remaining available in the above table, 1,420,928 and 3,829,072, respectively, were authorized pursuant to the 2005 Plan. (2) With respect to "equity compensation plans approved by security holders," included are 27,000 shares of our common stock with respect to which options were granted pursuant to the terms and conditions of the merger agreement related to the acquisition of The Greater New York Savings Bank and 28,896 shares of our common stock with respect to which options were granted pursuant to the terms and conditions of the merger agreement related to the acquisition of Long Island Bancorp, Inc. Both of these merger agreements were approved by our stockholders. Neither arrangement provides for the future issuance or grant of additional options, warrants, rights or restricted stock. (3) Of the shares available for future issuance, 3,829,072 were authorized pursuant to the 2005 Plan and 123,000 were authorized pursuant to the 1999 Stock Option Plan for Outside Directors of Astoria Financial Corporation, or the 1999 Plan. The 2005 Plan and the 1999 Plan provide for automatic adjustments to outstanding options or grants upon certain changes in capitalization. In the event of any stock split, stock dividend or other event generally affecting the number of shares of our common stock held by each person who is then a record holder of our common stock, the number of shares covered by each outstanding option, grant or award and the number of shares available for grant or award under the plans shall be adjusted to account for such event. (4) Shares of restricted stock have an exercise price of zero. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is included under the headings "Transactions with Certain Related Persons" and "Compensation Committee Interlocks and Insider Participation" in our definitive Proxy Statement to be utilized in connection with our Annual Meeting of Shareholders to be held on May 17, 2006, which will be filed with the SEC within 120 days from December 31, 2005, and is incorporated herein by reference. 72 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accountant fees and services is included under the headings "Audit Fees," "Audit-Related Fees," "Tax Fees" and "All Other Fees" in our definitive Proxy Statement to be utilized in connection with our Annual Meeting of Shareholders to be held on May 17, 2006, which will be filed with the SEC within 120 days from December 31, 2005, and is incorporated herein by reference. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements See Index to Consolidated Financial Statements on page 76. 2. Financial Statement Schedules Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto under Item 8, "Financial Statements and Supplementary Data." (b) Exhibits See Index of Exhibits on page 117. 73 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Astoria Financial Corporation /s/ George L. Engelke, Jr. Date: March 10, 2006 ----------------------------------------------- ----------------------- George L. Engelke, Jr. Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
NAME DATE ---- ---- /s/ George L. Engelke, Jr. March 10, 2006 ---------------------------------------------------- ----------------------- George L. Engelke, Jr. Chairman, President and Chief Executive Officer /s/ Monte N. Redman March 10, 2006 ---------------------------------------------------- ----------------------- Monte N. Redman Executive Vice President and Chief Financial Officer /s/ Gerard C. Keegan March 10, 2006 ---------------------------------------------------- ----------------------- Gerard C. Keegan Vice Chairman, Chief Administrative Officer and Director /s/ Andrew M. Burger March 10, 2006 ---------------------------------------------------- ----------------------- Andrew M. Burger Director /s/ John J. Conefry, Jr. March 10, 2006 ---------------------------------------------------- ----------------------- John J. Conefry, Jr. Director /s/ Denis J. Connors March 10, 2006 ---------------------------------------------------- ----------------------- Denis J. Connors Director /s/ Robert J. Conway March 10, 2006 ---------------------------------------------------- ----------------------- Robert J. Conway Director /s/ Thomas J. Donahue March 10, 2006 ---------------------------------------------------- ----------------------- Thomas J. Donahue Director /s/ Peter C. Haeffner, Jr. March 10, 2006 ---------------------------------------------------- ----------------------- Peter C. Haeffner, Jr. Director
74 /s/ Ralph F. Palleschi March 10, 2006 ---------------------------------------------------- ----------------------- Ralph F. Palleschi Director /s/ Thomas V. Powderly March 10, 2006 ---------------------------------------------------- ----------------------- Thomas V. Powderly Director /s/ Leo J. Waters March 10, 2006 ---------------------------------------------------- ----------------------- Leo J. Waters Director
75 CONSOLIDATED FINANCIAL STATEMENTS OF ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES INDEX
Page Management Report on Internal Control Over Financial Reporting .......................... 77 Reports of Independent Registered Public Accounting Firm ................................ 78 Consolidated Statements of Financial Condition at December 31, 2005 and 2004 ............ 80 Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003 .............................................................................. 81 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2005, 2004 and 2003 ...................................................... 82 Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 ......................................................................... 83 Notes to Consolidated Financial Statements .............................................. 84
76 MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Astoria Financial Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Astoria Financial Corporation's internal control system is a process designed to provide reasonable assurance to the company's management and board of directors regarding the preparation and fair presentation of published financial statements. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of Astoria Financial Corporation; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Astoria Financial Corporation's assets that could have a material effect on our financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Astoria Financial Corporation management assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2005. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on our assessment we believe that, as of December 31, 2005, the company's internal control over financial reporting is effective based on those criteria. Astoria Financial Corporation's independent registered public accounting firm has issued an audit report on our assessment of, and the effective operation of, the company's internal control over financial reporting as of December 31, 2005. This report appears on page 78. 77 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Stockholders of Astoria Financial Corporation We have audited management's assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that Astoria Financial Corporation and subsidiaries (the "Company") maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control--Integrated Framework issued by COSO. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Astoria Financial Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 8, 2006 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP New York, New York March 8, 2006 78 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Stockholders of Astoria Financial Corporation We have audited the accompanying consolidated statements of financial condition of Astoria Financial Corporation and subsidiaries (the "Company") as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Astoria Financial Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 8, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP New York, New York March 8, 2006 79 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
At December 31, ------------------------------- (In Thousands, Except Share Data) 2005 2004 - ---------------------------------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks $ 169,234 $ 138,809 Repurchase agreements 182,803 267,578 Available-for-sale securities: Encumbered 1,598,320 2,104,239 Unencumbered 243,031 302,644 - ---------------------------------------------------------------------------------------------------------------------- 1,841,351 2,406,883 Held-to-maturity securities, fair value of $4,627,013 and $6,306,760, respectively: Encumbered 4,500,867 5,273,385 Unencumbered 230,086 1,029,551 - ---------------------------------------------------------------------------------------------------------------------- 4,730,953 6,302,936 Federal Home Loan Bank of New York stock, at cost 145,247 163,700 Loans held-for-sale, net 23,651 23,802 Loans receivable 14,392,293 13,263,279 Allowance for loan losses (81,159) (82,758) - ---------------------------------------------------------------------------------------------------------------------- Loans receivable, net 14,311,134 13,180,521 Mortgage servicing rights, net 16,502 16,799 Accrued interest receivable 80,318 79,144 Premises and equipment, net 151,494 157,107 Goodwill 185,151 185,151 Bank owned life insurance 382,613 374,719 Other assets 159,820 118,720 - ---------------------------------------------------------------------------------------------------------------------- Total assets $ 22,380,271 $ 23,415,869 ====================================================================================================================== LIABILITIES: Deposits $ 12,810,455 $ 12,323,257 Reverse repurchase agreements 5,780,000 7,080,000 Federal Home Loan Bank of New York advances 1,724,000 1,934,000 Other borrowings, net 433,526 455,835 Mortgage escrow funds 124,929 122,088 Accrued expenses and other liabilities 157,134 130,925 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities 21,030,044 22,046,105 STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value; 5,000,000 shares authorized: Series A (1,800,000 shares authorized and -0- shares issued and outstanding) - - Series B (2,000,000 shares authorized and -0- shares issued and outstanding) - - Common stock, $.01 par value (200,000,000 shares authorized; 166,494,888 shares issued; and 104,967,280 and 110,304,669 shares outstanding, respectively) 1,665 1,665 Additional paid-in capital 824,102 811,777 Deferred compensation (5,636) - Retained earnings 1,774,924 1,623,571 Treasury stock (61,527,608 and 56,190,219 shares, at cost, respectively) (1,171,604) (1,013,726) Accumulated other comprehensive loss (49,536) (28,592) Unallocated common stock held by ESOP (6,465,273 and 6,802,146 shares, respectively) (23,688) (24,931) - ---------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 1,350,227 1,369,764 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 22,380,271 $ 23,415,869 ======================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 80 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, ------------------------------------------------ (In Thousands, Except Share Data) 2005 2004 2003 - ---------------------------------------------------------------------------------------------------------------------- Interest income: Mortgage loans: One-to-four family $ 459,929 $ 428,229 $ 466,544 Multi-family, commercial real estate and construction 239,119 220,703 203,785 Consumer and other loans 31,160 21,312 19,247 Mortgage-backed and other securities 340,626 371,044 355,564 Federal funds sold and repurchase agreements 6,123 1,140 1,538 Federal Home Loan Bank of New York stock 6,030 3,473 10,613 - ---------------------------------------------------------------------------------------------------------------------- Total interest income 1,082,987 1,045,901 1,057,291 - ---------------------------------------------------------------------------------------------------------------------- Interest expense: Deposits 281,399 237,429 225,251 Borrowings 322,808 337,906 452,502 - ---------------------------------------------------------------------------------------------------------------------- Total interest expense 604,207 575,335 677,753 - ---------------------------------------------------------------------------------------------------------------------- Net interest income 478,780 470,566 379,538 Provision for loan losses - - - - ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 478,780 470,566 379,538 - ---------------------------------------------------------------------------------------------------------------------- Non-interest income: Customer service fees 66,256 58,524 59,841 Other loan fees 4,980 4,805 7,556 Net gain on sales of securities - 4,651 7,346 Other-than-temporary impairment write-down of securities - (16,520) - Mortgage banking income, net 6,015 4,715 10,291 Income from bank owned life insurance 16,446 17,134 19,978 Other 8,502 6,775 14,549 - ---------------------------------------------------------------------------------------------------------------------- Total non-interest income 102,199 80,084 119,561 - ---------------------------------------------------------------------------------------------------------------------- Non-interest expense: General and administrative: Compensation and benefits 119,417 118,684 110,349 Occupancy, equipment and systems 63,695 64,592 59,892 Federal deposit insurance premiums 1,760 1,775 1,896 Advertising 8,815 6,583 5,833 Other 35,047 33,377 27,907 - ---------------------------------------------------------------------------------------------------------------------- Total non-interest expense 228,734 225,011 205,877 - ---------------------------------------------------------------------------------------------------------------------- Income before income tax expense 352,245 325,639 293,222 Income tax expense 118,442 106,102 96,376 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 233,803 $ 219,537 $ 196,846 ====================================================================================================================== Basic earnings per common share $ 2.30 $ 2.03 $ 1.68 ====================================================================================================================== Diluted earnings per common share $ 2.26 $ 2.00 $ 1.66 ====================================================================================================================== Basic weighted average common shares 101,476,376 107,930,909 114,574,956 Diluted weighted average common and common equivalent shares 103,408,637 109,806,855 115,942,058
See accompanying Notes to Consolidated Financial Statements. 81 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 and 2003
Additional Preferred Common Paid-in Deferred (In Thousands, Except Share Data) Total Stock Stock Capital Compensation - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 $ 1,553,998 $ 2,000 $ 1,665 $ 840,186 $ - Comprehensive income: Net income 196,846 - - - - Other comprehensive (loss) income, net of tax: Net unrealized loss on securities (57,226) - - - - Amortization of unrealized loss on securities transferred to held-to-maturity 775 - - - - Reclassification of loss on cash flow hedge 191 - - - - Minimum pension liability adjustment (29) - - - - ----------- Comprehensive income 140,557 ----------- Common stock repurchased (10,610,700 shares) (195,471) - - - - Redemption of preferred stock (54,500) (2,000) - (52,500) - Dividends on common and preferred stock ($0.57 per share and $2.25 per share, respectively) and amortization of purchase premium (70,076) - - (978) - Exercise of stock options and related tax benefit (1,407,355 shares issued) 14,851 - - 6,058 - Amortization relating to allocation of ESOP stock 7,172 - - 5,817 - - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2003 1,396,531 - 1,665 798,583 - Comprehensive income: Net income 219,537 - - - - Other comprehensive income (loss), net of tax: Net unrealized gain on securities 17,748 - - - - Reclassification of loss on cash flow hedge 191 - - - - Minimum pension liability adjustment (42) - - - - ----------- Comprehensive income 237,434 ----------- Common stock repurchased (9,067,500 shares) (225,052) - - - - Dividends on common stock ($0.67 per share) (71,982) - - - - Exercise of stock options and related tax benefit (1,366,788 shares issued) 24,142 - - 5,798 - Amortization relating to allocation of ESOP stock 8,691 - - 7,396 - - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2004 1,369,764 - 1,665 811,777 - Comprehensive income: Net income 233,803 - - - - Other comprehensive (loss) income, net of tax: Net unrealized loss on securities (21,083) - - - - Reclassification of loss on cash flow hedge 191 - - - - Minimum pension liability adjustment (52) - - - - ----------- Comprehensive income 212,859 ----------- Common stock repurchased (6,582,500 shares) (180,944) - - - - Dividends on common stock ($0.80 per share) (81,199) - - - - Exercise and acceleration of vesting of stock options and related tax benefit (1,048,283 shares issued) 20,488 - - 4,385 - Restricted stock grants (196,828 shares) - - - - (5,712) Amortization relating to earned portion of restricted stock and allocation of ESOP stock 9,259 - - 7,940 76 - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2005 $ 1,350,227 $ - $ 1,665 $ 824,102 $ (5,636) ========================================================================================================================= Accumulated Unallocated Other Common Retained Treasury Comprehensive Stock Held (In Thousands, Except Share Data) Earnings Stock Income (Loss) by ESOP - ----------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 $ 1,367,507 $ (639,579) $ 9,800 $ (27,581) Comprehensive income: Net income 196,846 - - - Other comprehensive (loss) income, net of tax: Net unrealized loss on securities - - (57,226) - Amortization of unrealized loss on securities transferred to held-to-maturity - - 775 - Reclassification of loss on cash flow hedge - - 191 - Minimum pension liability adjustment - - (29) - Comprehensive income Common stock repurchased (10,610,700 shares) - (195,471) - - Redemption of preferred stock - - - - Dividends on common and preferred stock ($0.57 per share and $2.25 per share, respectively) and amortization of purchase premium (69,098) - - - Exercise of stock options and related tax benefit (1,407,355 shares issued) (14,264) 23,057 - - Amortization relating to allocation of ESOP stock - - - 1,355 - ----------------------------------------------------------------------------------------------------------- Balance at December 31, 2003 1,480,991 (811,993) (46,489) (26,226) Comprehensive income: Net income 219,537 - - - Other comprehensive income (loss), net of tax: Net unrealized gain on securities - - 17,748 - Reclassification of loss on cash flow hedge - - 191 - Minimum pension liability adjustment - - (42) - Comprehensive income Common stock repurchased (9,067,500 shares) - (225,052) - - Dividends on common stock ($0.67 per share) (71,982) - - - Exercise of stock options and related tax benefit (1,366,788 shares issued) (4,975) 23,319 - - Amortization relating to allocation of ESOP stock - - - 1,295 - ----------------------------------------------------------------------------------------------------------- Balance at December 31, 2004 1,623,571 (1,013,726) (28,592) (24,931) Comprehensive income: Net income 233,803 - - - Other comprehensive (loss) income, net of tax: Net unrealized loss on securities - - (21,083) - Reclassification of loss on cash flow hedge - - 191 - Minimum pension liability adjustment - - (52) - Comprehensive income Common stock repurchased (6,582,500 shares) - (180,944) - - Dividends on common stock ($0.80 per share) (81,199) - - - Exercise and acceleration of vesting of stock options and related tax benefit (1,048,283 shares issued) (3,217) 19,320 - - Restricted stock grants (196,828 shares) 1,966 3,746 - - Amortization relating to earned portion of restricted stock and allocation of ESOP stock - - - 1,243 - ----------------------------------------------------------------------------------------------------------- Balance at December 31, 2005 $ 1,774,924 $(1,171,604) $ (49,536) $ (23,688) ===========================================================================================================
See accompanying Notes to Consolidated Financial Statements. 82 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, ---------------------------------------- (In Thousands) 2005 2004 2003 - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 233,803 $ 219,537 $ 196,846 Adjustments to reconcile net income to net cash provided by operating activities: Net premium amortization on mortgage loans and mortgage-backed securities 17,073 32,017 113,031 Net amortization on consumer and other loans, other securities and borrowings 4,743 4,066 981 Net provision for real estate losses 56 - 4 Depreciation and amortization 13,946 13,460 12,474 Net gain on sales of loans and securities (3,546) (8,199) (19,482) Other-than-temporary impairment write-down of securities - 16,520 - Gain on sale of joint venture real estate investment - - (10,058) Originations of loans held-for-sale (363,855) (326,499) (616,804) Proceeds from sales and principal repayments of loans held-for-sale 367,552 329,268 668,586 Amortization relating to earned portion of restricted stock and allocation of ESOP stock 9,259 8,691 7,172 (Increase) decrease in accrued interest receivable (1,174) (1,188) 10,952 Mortgage servicing rights amortization, valuation allowance adjustments and capitalized amounts, net 297 1,153 2,459 Income from bank owned life insurance, net of insurance proceeds received (7,894) (4,409) (11,412) (Increase) decrease in other assets (26,232) (6,528) 12,376 Increase (decrease) in accrued expenses and other liabilities 27,530 (453) (8,929) - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 271,558 277,436 358,196 - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Originations of loans receivable (3,390,543) (3,205,083) (5,468,504) Loan purchases through third parties (882,590) (1,171,606) (1,550,100) Principal payments on loans receivable 3,118,423 3,769,995 6,344,694 Purchases of securities held-to-maturity (177,599) (2,475,096) (5,521,833) Purchases of securities available-for-sale (25) (596,765) (3,780,994) Principal payments on securities held-to-maturity 1,749,866 1,957,248 4,729,460 Principal payments on securities available-for-sale 530,439 692,460 2,343,040 Proceeds from sales of securities available-for-sale - 170,189 1,457,010 Net redemptions of FHLB-NY stock 18,453 49,750 34,100 Proceeds from sales of real estate owned, net 2,002 2,157 1,528 Purchases of premises and equipment, net of proceeds from sales (8,333) (10,478) (15,266) Net proceeds from sale of joint venture real estate investment - - 10,140 - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 960,093 (817,229) (1,416,725) - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 487,198 1,136,663 119,398 Net (decrease) increase in borrowings with original terms of three months or less (1,360,000) 870,000 810,000 Proceeds from borrowings with original terms greater than three months 800,000 2,400,000 1,700,000 Repayments of borrowings with original terms greater than three months (970,000) (3,435,000) (1,700,000) Net increase in mortgage escrow funds 2,841 13,453 4,282 Common stock repurchased (180,944) (225,052) (195,471) Cash dividends paid to stockholders (81,199) (71,982) (72,076) Redemption of preferred stock - - (54,500) Cash received for options exercised 16,103 18,344 8,793 - -------------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (1,286,001) 706,426 620,426 - -------------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (54,350) 166,633 (438,103) Cash and cash equivalents at beginning of year 406,387 239,754 677,857 - -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 352,037 $ 406,387 $ 239,754 ================================================================================================================================ Supplemental disclosures: Cash paid during the year: Interest $ 606,084 $ 587,373 $ 680,504 ================================================================================================================================ Income taxes $ 104,786 $ 99,892 $ 88,478 ================================================================================================================================ Additions to real estate owned $ 2,203 $ 1,443 $ 2,075 ================================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 83 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies The following significant accounting and reporting policies of Astoria Financial Corporation and subsidiaries conform to U.S. generally accepted accounting principles, or GAAP, and are used in preparing and presenting these consolidated financial statements. (a) Basis of Presentation The accompanying consolidated financial statements include the accounts of Astoria Financial Corporation and its wholly-owned subsidiaries: Astoria Federal Savings and Loan Association and its subsidiaries, referred to as Astoria Federal, and AF Insurance Agency, Inc. As used in this annual report, "we," "us" and "our" refer to Astoria Financial Corporation and its consolidated subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. In addition to Astoria Federal and AF Insurance Agency, Inc., we have another subsidiary, Astoria Capital Trust I, which is not consolidated with Astoria Financial Corporation for financial reporting purposes in accordance with Financial Accounting Standards Board, or FASB, revised Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51," or FIN 46(R). See Note 8 for a further discussion of Astoria Capital Trust I. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The determination of our allowance for loan losses, the valuation of mortgage servicing rights, or MSR, and judgments regarding goodwill and securities impairment are particularly critical because they involve a higher degree of complexity and subjectivity and require estimates and assumptions about highly uncertain matters. Actual results may differ from our estimates and assumptions. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. (b) Cash and Cash Equivalents For the purpose of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold and repurchase agreements with original maturities of three months or less. Astoria Federal is required by the Federal Reserve System to maintain non-interest bearing cash reserves equal to a percentage of certain deposits. The reserve requirement totaled $46.8 million at December 31, 2005 and $47.9 million at December 31, 2004. (c) Repurchase Agreements (Securities Purchased Under Agreements to Resell) We purchase securities under agreements to resell (repurchase agreements). These agreements represent short-term loans and are reflected as an asset in the consolidated statements of financial condition. We may sell, loan or otherwise dispose of such securities to other parties in the normal course of our operations. The same securities are to be resold at the maturity of the repurchase agreements. (d) Securities Management determines the appropriate classification of securities at the time of acquisition. Our available-for-sale portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders' equity. Debt securities which we have the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Premiums and discounts are recognized as adjustments to interest income using the interest method over the remaining period to contractual maturity, adjusted for estimated prepayments when applicable. Gains and losses on the sale of all securities are determined using the specific identification method and are reflected in earnings when realized. For the years ended December 31, 2005, 2004 and 2003, we did not maintain a trading portfolio. We conduct a periodic review and evaluation of the securities portfolio to determine if the fair value of any security has declined below its carrying value and whether such decline is other-than-temporary. If such decline is deemed other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged to earnings. 84 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (e) Loans Held-for-Sale Generally, we originate fifteen year and thirty year fixed rate one-to-four family mortgage loans for sale to various government-sponsored enterprises, or GSEs, or other investors on a servicing released or retained basis. The sale of such loans is usually arranged through a master commitment on a mandatory delivery or best efforts basis. In addition, student loans are sold to the Student Loan Marketing Association generally before repayment begins during the grace period of the loan. Loans held-for-sale are carried at the lower of cost or estimated fair value, as determined on an aggregate basis. Net unrealized losses, if any, are recognized in a valuation allowance through charges to earnings. Premiums and discounts and origination fees and costs on loans held-for-sale are deferred and recognized as a component of the gain or loss on sale. Gains and losses on sales of loans held-for-sale are recognized on settlement dates and are determined by the difference between the sale proceeds and the allocated cost basis of the loans. (f) Loans Receivable Loans receivable are carried at the unpaid principal balances, net of unamortized premiums and discounts and deferred loan origination costs and fees, which are recognized as yield adjustments using the interest method. We generally amortize these amounts over the contractual life of the related loans, adjusted for estimated prepayments when applicable. We discontinue accruing interest on mortgage loans when such loans become 90 days delinquent as to their interest due. We discontinue accruing interest on consumer and other loans when such loans become 90 days delinquent as to their payment due. In addition, we reverse all previously accrued and uncollected interest through a charge to interest income. While loans are in non-accrual status, interest due is monitored and income is recognized only to the extent cash is received until a return to accrual status is warranted. In some circumstances, we continue to accrue interest on mortgage loans delinquent 90 days or more as to their maturity date but not their interest due. The allowance for loan losses is increased by charges to earnings and decreased by charge-offs, net of recoveries. Pursuant to our policy, loan losses are charged-off in the period the loans, or portions thereof, are deemed uncollectible. Our periodic evaluation of the adequacy of the allowance is based on our past loan loss experience, trends in portfolio volume, quality, maturity and composition, the status and amount of impaired and other non-performing and past-due loans, known and inherent risks in the portfolio, adverse situations that may affect a borrower's ability to repay, the estimated fair value of any underlying collateral and current and prospective, as well as specific and general, economic conditions. We review certain loans for individual impairment and groups of smaller balance loans based on homogeneous pools. Loans we individually review for impairment are limited to multi-family mortgage loans, commercial real estate loans, construction loans, loans modified in a troubled debt restructuring and selected large one-to-four family mortgage loans. A loan is considered impaired when, based upon current information and events, it is probable that we will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement. Impaired loans are principally measured using the market price of the loan, if one exists, the estimated fair value of the collateral, for collateral dependent loans, or the present value of expected future cash flows. Interest income on impaired non-accrual loans is recognized on a cash basis, while interest income on all other impaired loans is recognized on an accrual basis. (g) Mortgage Servicing Rights We recognize as separate assets the rights to service mortgage loans. The right to service loans for others is generally obtained through the sale of loans with servicing retained. The initial recognition of originated MSR is based upon an allocation of the total cost of the related loans between the loans and the servicing rights based on their relative estimated fair values. The fair value of MSR is estimated by reference to quoted market prices of similar loans sold servicing released. The cost of MSR is amortized over the estimated remaining lives of the loans serviced. MSR are carried at amortized cost less impairment, if any, which is recognized through a valuation allowance through charges to earnings. Fees earned for servicing loans are reported as income when the related mortgage loan payments are collected. 85 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) We assess impairment of our MSR based on the estimated fair value of those rights on a stratum-by-stratum basis with any impairment recognized through a valuation allowance for each impaired stratum. We stratify our MSR by underlying loan type (primarily fixed and adjustable) and interest rate. The estimated fair values of each MSR stratum are obtained through independent third party valuations through an analysis of future cash flows, incorporating numerous market based assumptions including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data. Individual allowances for each stratum are then adjusted in subsequent periods to reflect changes in the measurement of impairment. Increases in the fair value of impaired MSR are recognized only up to the amount of the previously recognized valuation allowance. During the 2005 third quarter, we entered into a sub-servicing agreement with Dovenmuehle Mortgage, Inc., or DMI, to outsource our mortgage loan servicing activities. Pursuant to this sub-servicing agreement, effective December 1, 2005, DMI has undertaken the servicing of our mortgage loan portfolio, including our portfolio of mortgage loans serviced for other investors. Fees paid to DMI are reported in non-interest expense. (h) Premises and Equipment Land is carried at cost. Buildings and improvements, leasehold improvements and furniture, fixtures and equipment are carried at cost, less accumulated depreciation and amortization totaling $126.7 million at December 31, 2005 and $122.9 million at December 31, 2004. Buildings and improvements and furniture, fixtures and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the term of the related leases or the estimated useful lives of the improved property. (i) Goodwill Goodwill is presumed to have an indefinite useful life and is tested, at least annually, for impairment at the reporting unit level. For purposes of our goodwill impairment testing, we have identified a single reporting unit. We use the quoted market price of our common stock on our impairment testing date as the basis for determining the fair value of our reporting unit. If the fair value of our reporting unit exceeds its carrying amount, further evaluation is not necessary. However, if the fair value of our reporting unit is less than its carrying amount, further evaluation is required to compare the implied fair value of the reporting unit's goodwill to its carrying amount to determine if a write-down of goodwill is required. As of December 31, 2005, the carrying value of our goodwill totaled $185.2 million. On September 30, 2005, we performed our annual goodwill impairment test and determined the fair value of our reporting unit to be in excess of its carrying amount by $1.44 billion. Accordingly, as of our annual impairment test date, there was no indication of goodwill impairment. We would test our goodwill for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount. No events have occurred and no circumstances have changed since our annual impairment test date that would more likely than not reduce the fair value of our reporting unit below its carrying amount. (j) Bank Owned Life Insurance Bank owned life insurance, or BOLI, is carried at its contract value and is classified as a non-interest earning asset. Increases in the contract value are recorded as non-interest income in the consolidated statements of income and insurance proceeds received are recorded as a reduction of the contract value. The contract value consists of cash surrender value of $356.3 million at December 31, 2005 and $350.3 million at December 31, 2004, claims stabilization reserve of $19.1 million at December 31, 2005 and $15.7 million at December 31, 2004 and deferred acquisition costs of $7.2 million at December 31, 2005 and $8.7 million at December 31, 2004. Repayment of the claims stabilization reserve (funds transferred from the cash surrender value to provide for future death benefit payments) and the deferred acquisition costs (costs incurred by the insurance carrier for the policy issuance) is guaranteed by the insurance carrier provided that certain conditions are met at the date of a contract surrender. We satisfied these conditions at December 31, 2005 and 2004. 86 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (k) Real Estate Owned Real estate acquired through foreclosure or by deed in lieu of foreclosure is initially recorded at the lower of cost or fair value, less estimated selling costs. Thereafter, we maintain an allowance for decreases in value which are charged to income along with any additional expenses incurred on the property. Fair value is estimated through current appraisals. Write-downs required at the time of acquisition are charged to the allowance for loan losses. Real estate owned, net, which is included in other assets, amounted to $1.1 million at December 31, 2005 and $920,000 at December 31, 2004. (l) Reverse Repurchase Agreements (Securities Sold Under Agreements to Repurchase) We enter into sales of securities under agreements to repurchase with selected dealers and banks. Such agreements are accounted for as secured financing transactions since we maintain effective control over the transferred securities and the transfer meets the other criteria for such accounting. Obligations to repurchase securities sold are reflected as a liability in our consolidated statements of financial condition. The securities underlying the agreements are delivered to a custodial account for the benefit of the dealer or bank with whom each transaction is executed. The dealers or banks, who may sell, loan or otherwise dispose of such securities to other parties in the normal course of their operations, agree to resell us the same securities at the maturities of the agreements. We retain the right of substitution of collateral throughout the terms of the agreements. The securities underlying the agreements are classified as encumbered securities in our consolidated statements of financial condition. (m) Derivative Instruments As part of our asset/liability management program, we utilize, from time-to-time, interest rate caps, floors, locks or swaps to reduce our sensitivity to interest rate fluctuations. These agreements are derivative instruments which are recorded as either assets or liabilities in the consolidated statements of financial condition at fair value. Changes in the fair values of derivatives are reported in our results of operations or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in those fair values or cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis. Derivatives that qualify for hedge accounting treatment are designated as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For fair value hedges, changes in the fair values of the derivative instruments are recognized in our results of operations together with changes in the fair values of the related assets and liabilities attributable to the hedged risk. For cash flow hedges, changes in the fair values of the derivative instruments are reported in other comprehensive income to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in other comprehensive income are reflected in the results of operations in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to our derivatives which qualify for hedge accounting. We establish, at the inception of the hedge, the method we will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge (the amount by which hedge gains or losses differ from the corresponding gains or losses on the hedged item). The ineffective portion of any hedge is recognized currently in our results of operations. We also enter into derivative instruments with no hedging designations. Changes in the fair values of these derivatives that do not qualify for hedge accounting treatment are recognized currently in our results of operations. Generally, other non-interest expense is increased or decreased by changes in the fair values of our derivatives which do not qualify for hedge accounting. We do not use derivatives for trading purposes. (n) Income Taxes Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates, applicable to future years, to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. Tax benefits attributable to stock option exercises are credited to additional paid-in capital. 87 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (o) Earnings Per Common Share Basic earnings per common share, or EPS, is computed by dividing net income less preferred dividends, if any, by the weighted-average common shares outstanding during the year. The weighted-average common shares outstanding includes the average number of shares of common stock outstanding less the weighted average number of unallocated shares held by the Employee Stock Ownership Plan, or ESOP, and the weighted average number of unvested shares of restricted stock. Diluted EPS is computed using the same method as basic EPS, but includes the effect of all dilutive potential common shares that were outstanding during the period, such as unexercised stock options and unvested shares of restricted stock, calculated using the treasury stock method. When applying the treasury stock method, we add: (1) the assumed proceeds from option exercises; (2) the tax benefit that would have been credited to additional paid-in capital assuming exercise of non-qualified stock options and vesting of shares of restricted stock; and (3) the average unamortized expense related to unvested shares of restricted stock. We then divide this sum by our average stock price to calculate shares repurchased. The excess of the number of shares issuable over the number of shares assumed to be repurchased is added to basic weighted average common shares to calculate diluted EPS. (p) Employee Benefits Astoria Federal has a qualified, non-contributory defined benefit pension plan, or the Astoria Federal Pension Plan, covering employees meeting specified eligibility criteria. Astoria Federal's policy is to fund pension costs in accordance with the minimum funding requirement. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. In addition, Astoria Federal has non-qualified and unfunded supplemental retirement plans covering certain officers and directors. We also sponsor a defined benefit health care plan that provides for postretirement medical and dental coverage to select individuals. The costs of postretirement benefits are accrued during an employee's active working career. We record compensation expense related to the ESOP at an amount equal to the shares allocated by the ESOP multiplied by the average fair value of our common stock during the reporting period, plus cash contributions made to participant accounts. For EPS disclosures, ESOP shares that have been committed to be released are considered outstanding. ESOP shares that have not been committed to be released are excluded from outstanding shares on a weighted average basis for EPS calculations. The difference between the fair value of shares for the period and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in capital. (q) Stock Incentive Plans We apply the intrinsic value method of Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our stock incentive plans. Accordingly, no stock-based employee compensation cost is reflected in net income for stock option grants, as all options granted under our stock incentive plans had an exercise price equal to the market value of the underlying common stock on the date of grant. However, we have recognized stock-based employee compensation cost for the year ended December 31, 2005 related to restricted stock grants and the acceleration of vesting of certain stock option grants. Compensation cost related to restricted stock grants is recognized on a straight-line basis over the vesting period. See Note 16 for a further discussion of the restricted stock grants and the acceleration of vesting of certain stock option grants. 88 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table illustrates the effect on net income and EPS if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards, or SFAS, No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
For the Year Ended December 31, --------------------------------- (In Thousands, Except Per Share Data) 2005 2004 2003 - --------------------------------------------------------------------------------------- Net income: As reported $ 233,803 $ 219,537 $ 196,846 Add: Total stock-based employee compensation expense included in net income as reported, net of related tax effects 118 - - Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (11,803) (5,072) (5,417) --------- --------- --------- Pro forma $ 222,118 $ 214,465 $ 191,429 ========= ========= ========= Basic earnings per common share: As reported $ 2.30 $ 2.03 $ 1.68 ========= ========= ========= Pro forma $ 2.19 $ 1.99 $ 1.63 ========= ========= ========= Diluted earnings per common share: As reported $ 2.26 $ 2.00 $ 1.66 ========= ========= ========= Pro forma $ 2.14 $ 1.95 $ 1.61 ========= ========= =========
In December 2004, the FASB issued revised SFAS No. 123, "Share-Based Payment," or SFAS No. 123(R), which requires public entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). The fair-value-based method in SFAS No. 123(R) is similar to the fair-value-based method in SFAS No. 123 in most respects. SFAS No. 123(R) applies to all awards granted after the required effective date and to awards modified, repurchased or cancelled after that date. Additionally, beginning on the required effective date, public entities will recognize compensation cost for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures. The cumulative effect of initially applying SFAS No. 123(R), if any, is recognized as of the required effective date. For periods before the required effective date, public entities may elect, although they are not required, to retroactively restate financial statements for prior periods to recognize compensation cost on a basis consistent with the pro forma disclosures required for those periods by SFAS No. 123. SFAS No. 123(R) is effective as of the beginning of the first annual reporting period beginning after June 15, 2005. Our adoption of SFAS No. 123(R), effective January 1, 2006, is expected to reduce our 2006 net income by approximately $1.1 million with respect to our December 2005 option grants and approximately $160,000 with respect to option grants to directors made in January 2006. Additional equity grants that may be made in 2006 will also result in compensation expense. (r) Segment Reporting As a community-oriented financial institution, substantially all of our operations involve the delivery of loan and deposit products to customers. We make operating decisions and assess performance based on an ongoing review of these community banking operations, which constitute our only operating segment for financial reporting purposes. (2) Repurchase Agreements Repurchase agreements averaged $195.9 million during the year ended December 31, 2005 and $85.8 million during the year ended December 31, 2004. The maximum amount of such agreements outstanding at any month end was $272.5 million during the year ended December 31, 2005 and $267.6 million during the year ended December 31, 2004. As of December 31, 2005, two repurchase agreements totaling $182.8 million were outstanding. As of December 31, 2004, three repurchase agreements totaling $267.6 million were outstanding. The fair value of the securities held under these agreements was $188.2 million as of December 31, 2005 and $273.8 million as of December 31, 2004. None of the securities held under repurchase agreements were sold or repledged during the years ended December 31, 2005 and 2004. 89 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (3) Securities The amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at December 31, 2005 and 2004 are as follows:
At December 31, 2005 --------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (In Thousands) Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------- Available-for-sale: Mortgage-backed securities: REMICs and CMOs: GSE issuance $ 1,645,961 $ 100 $ (78,749) $ 1,567,312 Non-GSE issuance 61,735 14 (3,811) 57,938 GSE pass-through certificates 91,211 2,003 (90) 93,124 - -------------------------------------------------------------------------------------------------------- Total mortgage-backed securities 1,798,907 2,117 (82,650) 1,718,374 - -------------------------------------------------------------------------------------------------------- Other securities: FNMA and FHLMC preferred stock 123,495 32 (3,032) 120,495 Other securities 2,503 2 (23) 2,482 - -------------------------------------------------------------------------------------------------------- Total other securities 125,998 34 (3,055) 122,977 - -------------------------------------------------------------------------------------------------------- Total securities available-for-sale $ 1,924,905 $ 2,151 $ (85,705) $ 1,841,351 ======================================================================================================== Held-to-maturity: Mortgage-backed securities: REMICs and CMOs: GSE issuance $ 4,346,631 $ 117 $ (96,022) $ 4,250,726 Non-GSE issuance 354,395 - (8,296) 346,099 GSE pass-through certificates 5,737 191 (2) 5,926 - -------------------------------------------------------------------------------------------------------- Total mortgage-backed securities 4,706,763 308 (104,320) 4,602,751 Obligations of states and political subdivisions and corporate debt securities 24,190 72 - 24,262 - -------------------------------------------------------------------------------------------------------- Total securities held-to-maturity $ 4,730,953 $ 380 $(104,320) $ 4,627,013 ======================================================================================================== At December 31, 2004 --------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (In Thousands) Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------- Available-for-sale: Mortgage-backed securities: REMICs and CMOs: GSE issuance $ 2,125,549 $ 605 $ (48,252) $ 2,077,902 Non-GSE issuance 78,974 39 (3,298) 75,715 GSE pass-through certificates 123,029 3,628 (87) 126,570 - -------------------------------------------------------------------------------------------------------- Total mortgage-backed securities 2,327,552 4,272 (51,637) 2,280,187 - -------------------------------------------------------------------------------------------------------- Other securities: FNMA and FHLMC preferred stock 123,495 53 - 123,548 Other securities 3,152 10 (14) 3,148 - -------------------------------------------------------------------------------------------------------- Total other securities 126,647 63 (14) 126,696 - -------------------------------------------------------------------------------------------------------- Total securities available-for-sale $ 2,454,199 $ 4,335 $ (51,651) $ 2,406,883 ======================================================================================================== Held-to-maturity: Mortgage-backed securities: REMICs and CMOs: GSE issuance $ 5,772,676 $25,353 $ (19,144) $ 5,778,885 Non-GSE issuance 480,053 1,128 (4,474) 476,707 GSE pass-through certificates 9,154 537 - 9,691 - -------------------------------------------------------------------------------------------------------- Total mortgage-backed securities 6,261,883 27,018 (23,618) 6,265,283 Obligations of states and political subdivisions and corporate debt securities 41,053 424 - 41,477 - -------------------------------------------------------------------------------------------------------- Total securities held-to-maturity $ 6,302,936 $27,442 $ (23,618) $ 6,306,760 ========================================================================================================
90 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following tables set forth the estimated fair values of securities with gross unrealized losses at December 31, 2005 and 2004, segregated between securities that have been in a continuous unrealized loss position for less than twelve months at the respective dates and those that have been in a continuous unrealized loss position for twelve months or longer.
At December 31, 2005 --------------------------------------------------------------------------- Less Than Twelve Months Twelve Months or Longer Total ----------------------- ----------------------- ----------------------- Gross Gross Gross Estimated Unrealized Estimated Unrealized Estimated Unrealized (In Thousands) Fair Value Losses Fair Value Losses Fair Value Losses - -------------------------------------------------------------------------------------------------------------------- Available-for-sale: Mortgage-backed securities: REMICs and CMOs: GSE issuance $ 107,888 $ (2,377) $1,453,323 $ (76,372) $1,561,211 $ (78,749) Non-GSE issuance 1,310 (2) 55,709 (3,809) 57,019 (3,811) GSE pass-through certificates 7,583 (34) 2,436 (56) 10,019 (90) Other securities: FNMA and FHLMC preferred stock 120,448 (3,032) - - 120,448 (3,032) Other securities 250 (1) 1,080 (22) 1,330 (23) - -------------------------------------------------------------------------------------------------------------------- Total temporarily impaired securities available-for-sale $ 237,479 $ (5,446) $1,512,548 $ (80,259) $1,750,027 $ (85,705) ==================================================================================================================== Held-to-maturity: Mortgage-backed securities: REMICs and CMOs: GSE issuance $2,630,151 $(40,881) $1,599,067 $ (55,141) $4,229,218 $ (96,022) Non-GSE issuance 91,948 (1,049) 254,109 (7,247) 346,057 (8,296) GSE pass-through certificates 55 (1) 45 (1) 100 (2) - -------------------------------------------------------------------------------------------------------------------- Total temporarily impaired securities held-to-maturity $2,722,154 $(41,931) $1,853,221 $ (62,389) $4,575,375 $(104,320) ====================================================================================================================
At December 31, 2004 --------------------------------------------------------------------------- Less Than Twelve Months Twelve Months or Longer Total ----------------------- ----------------------- ----------------------- Gross Gross Gross Estimated Unrealized Estimated Unrealized Estimated Unrealized (In Thousands) Fair Value Losses Fair Value Losses Fair Value Losses - -------------------------------------------------------------------------------------------------------------------- Available-for-sale: Mortgage-backed securities: REMICs and CMOs: GSE issuance $1,031,174 $ (6,691) $ 888,198 $ (41,561) $1,919,372 $ (48,252) Non-GSE issuance 4,741 (15) 67,567 (3,283) 72,308 (3,298) GSE pass-through certificates 3,956 (46) 1,650 (41) 5,606 (87) Other securities 1,093 (12) 414 (2) 1,507 (14) - -------------------------------------------------------------------------------------------------------------------- Total temporarily impaired securities available-for-sale $1,040,964 $ (6,764) $ 957,829 $ (44,887) $1,998,793 $ (51,651) ==================================================================================================================== Held-to-maturity: Mortgage-backed securities: REMICs and CMOs: GSE issuance $2,239,767 $ (17,025) $ 93,244 $ (2,119) $2,333,011 $ (19,144) Non-GSE issuance 341,904 (4,474) - - 341,904 (4,474) - -------------------------------------------------------------------------------------------------------------------- Total temporarily impaired securities held-to-maturity $2,581,671 $ (21,499) $ 93,244 $ (2,119) $2,674,915 $ (23,618) ====================================================================================================================
The number of securities which had an unrealized loss totaled 228 at December 31, 2005 and 142 at December 31, 2004. Of the securities in an unrealized loss position, 93.6% at December 31, 2005 and 91.1% at December 31, 2004, based on estimated fair value, are obligations of GSEs. At December 31, 2005 and 2004, substantially all of the securities in an unrealized loss position had a fixed interest rate and the cause of the temporary impairment is directly related to the change in interest rates. In general, as interest rates rise, the fair value of fixed rate securities will decrease; as interest rates fall, the fair value of fixed rate securities will increase. We generally view changes in fair value caused by changes in interest rates as temporary, which is consistent with our experience. Therefore, as of December 31, 2005 and 2004, the impairments are deemed temporary based on the direct relationship of the decline in fair value to movements in interest rates, the estimated remaining life and high credit quality of the investments 91 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) and our ability and intent to hold these investments until there is a full recovery of the unrealized loss, which may be maturity. In November 2005, the FASB issued Staff Position Nos. 115-1 and 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," or FSP No. 115-1, which addresses the determination of when an investment is considered impaired, whether the impairment is other-than-temporary and how to measure an impairment loss. FSP No. 115-1 also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP No. 115-1 replaces the impairment guidance in Emerging Issues Task Force, or EITF, Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," with references to existing authoritative literature concerning other-than-temporary impairment determinations (principally SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and Securities and Exchange Commission, or SEC, Staff Accounting Bulletin No. 59, "Accounting for Noncurrent Marketable Equity Securities"). Under FSP No. 115-1, impairment losses must be recognized in earnings for the difference between the security's cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. FSP No. 115-1 also requires that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. FSP No. 115-1 is effective for reporting periods beginning after December 15, 2005. We do not expect our application of FSP No. 115-1 to have a material impact on our financial condition or results of operations. During the year ended December 31, 2004, we recorded a $16.5 million other-than-temporary impairment write-down on $120.0 million of FHLMC perpetual preferred securities which is included as a component of non-interest income. There were no other-than-temporary impairment write-downs recorded for the years ended December 31, 2005 and 2003. There were no sales of securities from the available-for-sale portfolio during the year ended December 31, 2005. During the year ended December 31, 2004, proceeds from sales of securities from the available-for-sale portfolio totaled $170.2 million resulting in gross realized gains totaling $4.7 million. During the year ended December 31, 2003, proceeds from sales of securities from the available-for-sale portfolio totaled $1.46 billion resulting in gross realized gains totaling $14.6 million and gross realized losses totaling $7.3 million. The amortized cost and estimated fair value of debt securities at December 31, 2005, by contractual maturity, excluding mortgage-backed securities, are summarized in the following table. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. In addition, issuers of certain securities have the right to call obligations with or without prepayment penalties. At December 31, 2005 ---------------------- Estimated Amortized Fair (In Thousands) Cost Value - ---------------------------------------------------------------------- Available-for-sale: Due in one year or less $ 1,753 $ 1,741 Due after one year through five years 750 741 - ---------------------------------------------------------------------- Total available-for-sale $ 2,503 $ 2,482 ====================================================================== Held-to-maturity: Due after one year through five years $ 9,992 $ 10,064 Due after ten years 14,198 14,198 - ---------------------------------------------------------------------- Total held-to-maturity $ 24,190 $ 24,262 ====================================================================== The balance of accrued interest receivable for securities totaled $24.0 million at December 31, 2005 and $31.6 million at December 31, 2004. As of December 31, 2005, the amortized cost of the callable securities in our portfolio totaled $124.1 million, of which $107.8 million are callable within one year and at various times thereafter. 92 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (4) Loans Receivable Loans receivable, net are summarized as follows: At December 31, ---------------------------- (In Thousands) 2005 2004 - ------------------------------------------------------------------------ Mortgage loans: One-to-four family $ 9,757,920 $ 9,054,747 Multi-family 2,826,807 2,558,935 Commercial real estate 1,075,914 944,859 Construction 137,012 117,766 - ------------------------------------------------------------------------ 13,797,653 12,676,307 Net deferred loan origination costs 8,119 3,400 Net unamortized premiums 74,032 66,427 - ------------------------------------------------------------------------ Total mortgage loans, net 13,879,804 12,746,134 - ------------------------------------------------------------------------ Consumer and other loans: Home equity 460,064 466,087 Commercial 24,644 21,819 Other 17,796 19,382 - ------------------------------------------------------------------------ 502,504 507,288 Net deferred loan origination costs 9,443 9,180 Net unamortized premiums 542 677 - ------------------------------------------------------------------------ Total consumer and other loans, net 512,489 517,145 - ------------------------------------------------------------------------ Total loans 14,392,293 13,263,279 Allowance for loan losses (81,159) (82,758) - ------------------------------------------------------------------------ Loans receivable, net $ 14,311,134 $ 13,180,521 ======================================================================== Accrued interest receivable on all loans totaled $56.2 million at December 31, 2005 and $47.4 million at December 31, 2004. Our one-to-four family loans receivable consist primarily of adjustable rate mortgage, or ARM, loans which consist primarily of hybrid and interest only ARM loans. We currently offer hybrid ARM loans which initially have a fixed rate for one, three, five, seven or ten years and convert into one year ARM loans at the end of the initial fixed rate period and require the borrower to make principal and interest payments during the entire loan term. We also offer interest only ARM loans, which have an initial fixed rate for three, five or seven years and convert into one year interest only ARM loans at the end of the initial fixed rate period. Interest only ARM loans require the borrower to pay interest only during the first ten years of the loan term. After the tenth anniversary of the loan, principal and interest payments are required to amortize the loan over the remaining loan term. Our portfolio of one-to-four family interest only ARM loans totaled $4.97 billion, or 54.0% of our one-to-four family ARM loans, at December 31, 2005 and $3.13 billion, or 37.2% of our one-to-four family ARM loans, at December 31, 2004. During 2005, we began originating interest only multi-family and commercial real estate loans to qualified borrowers. The interest only loans do not comprise a significant portion of the total multi-family and commercial real estate loan portfolio at December 31, 2005. We do not originate negative amortization or payment option ARM loans. At December 31, 2005, $8.06 billion, or 58.4%, of our total mortgage loan portfolio was secured by properties located in 43 states, other than New York, and the District of Columbia. We have a concentration of greater than 5.0% of our total mortgage loan portfolio in six states: 41.6% in New York, 12.5% in New Jersey, 8.9% in Connecticut, 6.6% in Virginia, 6.4% in Illinois and 5.5% in Maryland. Included in loans receivable were non-accrual loans totaling $64.9 million at December 31, 2005 and $32.0 million at December 31, 2004. If all non-accrual loans had been performing in accordance with their original terms, we would have recorded interest income, with respect to such loans, of $3.8 million for the year ended December 31, 2005, $1.8 million for the year ended December 31, 2004 and $1.9 million for the year ended December 31, 2003. This compares to actual payments recorded as interest income, with respect to such loans, of $2.4 million for the year ended December 31, 2005, $1.0 million for the year ended December 31, 2004 and $1.2 million for the year ended December 31, 2003. Loans delinquent 90 days or more and still accruing interest totaled $176,000 at December 31, 2005 and $573,000 at December 31, 2004. These loans are delinquent 90 days or more as to their maturity date but not their interest due. 93 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following tables summarize information regarding our impaired mortgage loans: At December 31, 2005 ------------------------------------ Allowance Recorded for Loan Net (In Thousands) Investment Losses Investment - -------------------------------------------------------------------------------- One-to-four family $ 7,650 $ (633) $ 7,017 Multi-family, commercial real estate and construction 30,729 (6,245) 24,484 - -------------------------------------------------------------------------------- Total impaired mortgage loans $ 38,379 $ (6,878) $ 31,501 ================================================================================ At December 31, 2004 ------------------------------------ Allowance Recorded for Loan Net (In Thousands) Investment Losses Investment - -------------------------------------------------------------------------------- One-to-four family $ 5,703 $ (398) $ 5,305 Multi-family, commercial real estate and construction 12,371 (1,824) 10,547 - -------------------------------------------------------------------------------- Total impaired mortgage loans $ 18,074 $ (2,222) $ 15,852 ================================================================================ Our average recorded investment in impaired loans was $21.6 million for the year ended December 31, 2005, $12.9 million for the year ended December 31, 2004 and $15.4 million for the year ended December 31, 2003. Interest income recognized on impaired loans, which was not materially different from cash-basis interest income, amounted to $1.3 million for the year ended December 31, 2005, $616,000 for the year ended December 31, 2004 and $597,000 for the year ended December 31, 2003. (5) Allowance for Loan Losses Activity in the allowance for loan losses is summarized as follows: For the Year Ended December 31, ------------------------------------ (In Thousands) 2005 2004 2003 - -------------------------------------------------------------------------------- Balance at beginning of year $ 82,758 $ 83,121 $ 83,546 Provision charged to operations - - - Charge-offs (net of recoveries of $506, $524 and $911, respectively) (1,599) (363) (425) - -------------------------------------------------------------------------------- Balance at end of year $ 81,159 $ 82,758 $ 83,121 ================================================================================ (6) Mortgage Servicing Rights We own rights to service mortgage loans for investors with aggregate unpaid principal balances of $1.50 billion at December 31, 2005 and $1.67 billion at December 31, 2004, which are not reflected in the accompanying consolidated statements of financial condition. As described in Note 1(g), effective December 1, 2005, we outsourced our mortgage loan servicing to a third party under a sub-servicing agreement. MSR activity is summarized as follows: For the Year Ended December 31, ------------------------------------ (In Thousands) 2005 2004 2003 - -------------------------------------------------------------------------------- Amortized cost at beginning of year $ 26,189 $ 29,552 $ 35,093 Additions 2,223 3,409 7,225 Amortization (5,239) (6,772) (12,766) - -------------------------------------------------------------------------------- Amortized cost at end of year 23,173 26,189 29,552 Valuation allowance (6,671) (9,390) (11,600) - -------------------------------------------------------------------------------- MSR, net $ 16,502 $ 16,799 $ 17,952 ================================================================================ 94 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) At December 31, 2005, our MSR, net, had an estimated fair value of $16.5 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.07%, a weighted average constant prepayment rate on mortgages of 15.84% and a weighted average life of 4.7 years. At December 31, 2004, our MSR, net, had an estimated fair value of $16.8 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.10%, a weighted average constant prepayment rate on mortgages of 15.33% and a weighted average life of 4.8 years. As of December 31, 2005, estimated future MSR amortization through 2010, based on the prepayment assumptions utilized in the December 31, 2005 MSR valuation, is as follows: $3.6 million for 2006, $3.1 million for 2007, $2.6 million for 2008, $2.2 million for 2009 and $1.9 million for 2010. Actual results will vary depending upon the level of repayments on the loans currently serviced. Mortgage banking income, net, is summarized as follows: For the Year Ended December 31, ------------------------------------ (In Thousands) 2005 2004 2003 - -------------------------------------------------------------------------------- Loan servicing fees $ 5,021 $ 5,768 $ 7,851 Net gain on sales of loans 3,514 3,509 12,124 Amortization of MSR (5,239) (6,772) (12,766) Recovery of valuation allowance on MSR 2,719 2,210 3,082 - -------------------------------------------------------------------------------- Total mortgage banking income, net $ 6,015 $ 4,715 $ 10,291 ================================================================================ (7) Deposits Deposits are summarized as follows:
At December 31, ------------------------------------------------------------------------ 2005 2004 ------------------------------------------------------------------------ Weighted Weighted Average Percent Average Percent (Dollars in Thousands) Rate Balance of Total Rate Balance of Total - ------------------------------------------------------------------------------------------------------ Core deposits: Savings 0.40% $ 2,510,897 19.61% 0.40% $ 2,929,120 23.78% Money market 0.95 648,730 5.06 0.80 965,288 7.83 NOW 0.10 942,919 7.36 0.10 961,497 7.80 Non-interest bearing NOW and demand deposit - 626,940 4.89 - 619,217 5.02 Liquid CDs 3.66 619,784 4.84 - - - ---- ------------ ------ ---- ------------ ------ Total core deposits 0.74 5,349,270 41.76 0.37 5,475,122 44.43 Certificates of deposit 3.73 7,461,185 58.24 3.46 6,848,135 55.57 - ------------------------------------------------------------------------------------------------------ Total deposits 2.48% $ 12,810,455 100.00% 2.09% $ 12,323,257 100.00% ======================================================================================================
Liquid certificates of deposit, or Liquid CDs, were introduced in January 2005 and have maturities of three months, require the maintenance of a minimum balance and allow depositors the ability to make periodic deposits to and withdrawals from their account. We consider Liquid CDs as part of our core deposits, along with savings accounts, money market accounts and NOW and demand deposit accounts. Certificates of deposit include all time deposits other than Liquid CDs. The aggregate amount of certificates of deposit and Liquid CDs with balances equal to or greater than $100,000 was $2.31 billion at December 31, 2005 and $1.58 billion at December 31, 2004. 95 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Certificates of deposit and Liquid CDs at December 31, 2005 have scheduled maturities as follows: Weighted Percent Average of Year Rate Balance Total ---------------------------------------------------------------------- (In Thousands) 2006 3.48% $ 4,887,403 60.49% 2007 4.06 1,629,648 20.17 2008 4.12 919,844 11.38 2009 4.18 427,668 5.29 2010 4.29 186,144 2.30 2011 and thereafter 4.25 30,262 0.37 ---------------------------------------------------------------------- Total 3.73% $ 8,080,969 100.00% ====================================================================== Interest expense on deposits is summarized as follows: For the Year Ended December 31, ---------------------------------- (In Thousands) 2005 2004 2003 - -------------------------------------------------------------------------------- Savings $ 11,015 $ 11,920 $ 13,198 Money market 7,513 6,379 9,934 Interest-bearing NOW 928 921 1,526 Liquid CDs 10,708 - - Certificates of deposit 251,235 218,209 200,593 - -------------------------------------------------------------------------------- Total interest expense on deposits $ 281,399 $ 237,429 $ 225,251 ================================================================================ (8) Borrowings Borrowings are summarized as follows: At December 31, ----------------------------------------------- 2005 2004 ----------------------------------------------- Weighted Weighted Average Average (Dollars in Thousands) Amount Rate Amount Rate - ------------------------------------------------------------------------------- Reverse repurchase agreements $ 5,780,000 3.57% $ 7,080,000 3.54% FHLB-NY advances 1,724,000 4.50 1,934,000 2.81 Other borrowings, net 433,526 7.19 455,835 7.21 - ------------------------------------------------------------------------------- Total borrowings, net $ 7,937,526 3.97% $ 9,469,835 3.57% =============================================================================== Reverse Repurchase Agreements At December 31, 2005 and 2004, substantially all of the outstanding reverse repurchase agreements had original contractual maturities between one and ten years and were primarily secured by mortgage-backed securities. Reverse repurchase agreements with the Federal Home Loan Bank of New York, or FHLB-NY, may also be secured by certain qualifying mortgage loans pursuant to a blanket collateral agreement with the FHLB-NY. 96 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following is a summary of information relating to reverse repurchase agreements:
At December 31, ------------------------- (In Thousands) 2005 2004 - --------------------------------------------------------------------------------------------- Amortized cost of collateral (including accrued interest): Mortgage-backed securities $ 6,253,654 $ 7,480,040 Mortgage loans - 77,123 Estimated fair value of collateral (including accrued interest): Mortgage-backed securities 6,076,473 7,430,135 Mortgage loans - 78,184
At or For the Year Ended December 31, ---------------------------------------- (Dollars in Thousands) 2005 2004 2003 - ---------------------------------------------------------------------------------------------- Average balance during the year $6,751,096 $6,904,483 $6,642,945 Maximum balance at any month end during the year 7,580,000 7,085,000 7,235,000 Balance outstanding at end of the year 5,780,000 7,080,000 7,235,000 Weighted average interest rate during the year 3.54% 3.81% 5.01% Weighted average interest rate at end of the year 3.57 3.54 4.62
Reverse repurchase agreements at December 31, 2005 have contractual maturities as follows: Year Amount ----------------------- (In Thousands) 2006 $ 1,300,000 2007 1,750,000 2008 1,930,000 2009 300,000 2015 500,000 ----------------------- Total $ 5,780,000 ======================= Of the $1.30 billion of reverse repurchase agreements maturing in 2006, $100.0 million are due in less than 30 days, $200.0 million are due in 30 to 90 days and $1.00 billion are due after 90 days. At December 31, 2005, $1.68 billion of reverse repurchase agreements which mature after December 31, 2006 are callable in 2006 and at various times thereafter. The $500.0 million of reverse repurchase agreements which mature in 2015 are callable in 2007 and at various times thereafter and have floating interest rates which are indexed to the three-month LIBOR and reset quarterly. The remaining reverse repurchase agreements have fixed interest rates. FHLB-NY Advances Pursuant to a blanket collateral agreement with the FHLB-NY, advances are secured by all of our stock in the FHLB-NY, certain qualifying mortgage loans and mortgage-backed and other securities not otherwise pledged in an amount at least equal to 110% of the advances outstanding. The following is a summary of information relating to FHLB-NY advances:
At or For the Year Ended December 31, ---------------------------------------- (Dollars in Thousands) 2005 2004 2003 - ---------------------------------------------------------------------------------------------- Average balance during the year $1,370,701 $1,816,197 $2,574,091 Maximum balance at any month end during the year 1,813,000 3,134,000 3,517,000 Balance outstanding at end of the year 1,724,000 1,934,000 1,924,000 Weighted average interest rate during the year 3.64% 2.24% 3.30% Weighted average interest rate at end of the year 4.50 2.81 2.32
97 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) FHLB-NY advances at December 31, 2005 have contractual maturities as follows: Year Amount ----------------------- (In Thousands) 2006 $ 924,000 2007 100,000 2008 700,000 ----------------------- Total $ 1,724,000 ======================= Of the $924.0 million of FHLB-NY advances maturing in 2006, $40.0 million are due overnight, $780.0 million are due in less than 30 days, $4.0 million are due in 30 to 90 days and $100.0 million are due after 90 days. At December 31, 2005, $500.0 million of FHLB-NY advances which mature after December 31, 2006 are callable in 2006 and at various times thereafter. At December 31, 2005, we had a 12-month commitment for overnight and one month lines of credit with the FHLB-NY totaling $200.0 million, of which $40.0 million was outstanding under the overnight and $50.0 million was outstanding under the one month line of credit. Both lines of credit are priced at the federal funds rate plus a spread (generally between 10 and 15 basis points) and reprice daily. Other Borrowings During the quarter ended December 31, 2002, we issued $250.0 million of senior unsecured notes due in 2012 bearing a fixed interest rate of 5.75%. The notes, which are designated as our 5.75% Senior Notes due 2012, Series B, are registered with the SEC. We may redeem all or part of the notes at any time at a "make-whole" redemption price, together with accrued interest to the redemption date. The carrying amount of the 5.75% senior unsecured notes, net of deferred costs, was $247.5 million at December 31, 2005 and $247.1 million at December 31, 2004. On July 3, 2001, we issued $100.0 million of senior unsecured notes. The notes, which were issued in a private placement, mature in 2008, bear a fixed interest rate of 7.67%, were placed with a limited number of institutional investors and are not registered with the SEC. The notes require annual principal payments of $20.0 million which began in 2004. The carrying amount of the 7.67% senior unsecured notes, net of deferred costs, was $59.8 million at December 31, 2005 and $79.6 million at December 31, 2004. On October 28, 1999, our finance subsidiary, Astoria Capital Trust I, issued $125.0 million aggregate liquidation amount of 9.75% Capital Securities due November 1, 2029, or Capital Securities, in a private placement, and $3.9 million of common securities (which are the only voting securities of Astoria Capital Trust I), which are 100% owned by Astoria Financial Corporation, and used the proceeds to acquire Junior Subordinated Debentures issued by Astoria Financial Corporation. The Junior Subordinated Debentures total $128.9 million, have an interest rate of 9.75%, mature on November 1, 2029 and are the sole assets of Astoria Capital Trust I. The Junior Subordinated Debentures are prepayable, in whole or in part, at our option on or after November 1, 2009 at declining premiums to November 1, 2019, after which the Junior Subordinated Debentures are prepayable at par value. The Capital Securities have the same prepayment provisions as the Junior Subordinated Debentures. Astoria Financial Corporation has fully and unconditionally guaranteed the Capital Securities along with all obligations of Astoria Capital Trust I under the trust agreement relating to the Capital Securities. We have two interest rate swap agreements, designated as fair value hedges, that have the effect of converting $125.0 million of the Junior Subordinated Debentures from a 9.75% fixed rate instrument into a variable rate, LIBOR-based instrument. The carrying amount of the Junior Subordinated Debentures has been adjusted for changes in estimated fair value to satisfy hedge accounting requirements. See Note 10 for additional information on the interest rate swap agreements. The carrying amount of the Junior Subordinated Debentures, net of deferred costs and including fair value hedge adjustments, was $126.2 million at December 31, 2005 and $129.1 million at December 31, 2004. The terms of our other borrowings subject us to certain debt covenants. We were in compliance with these debt covenants at December 31, 2005. 98 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Other borrowings at December 31, 2005 have contractual maturities as follows: Year Amount ------------------------------------- (In Thousands) 2006 $ 20,000 2007 20,000 2008 20,000 2012 and thereafter 378,866 ------------------------------------- Total $ 438,866 ===================================== Interest expense on borrowings is summarized as follows: For the Year Ended December 31, --------------------------------- (Dollars in Thousands) 2005 2004 2003 - ------------------------------------------------------------------------- Reverse repurchase agreements $ 242,255 $ 267,527 $ 337,057 FHLB-NY advances 50,400 41,016 85,629 Other borrowings 30,153 29,363 29,816 - ------------------------------------------------------------------------- Total interest expense on borrowings $ 322,808 $ 337,906 $ 452,502 ========================================================================= (9) Stockholders' Equity On May 19, 2004, our Board of Directors approved our tenth stock repurchase plan authorizing the purchase, at management's discretion, of 12,000,000 shares, or approximately 10% of our common stock then outstanding, over a two year period in open-market or privately negotiated transactions. During 2005, we repurchased 6,582,500 shares of our common stock at an aggregate cost of $180.9 million. In total, as of December 31, 2005, 11,737,700 shares of our common stock, at an aggregate cost of $308.6 million, have been repurchased under our tenth stock repurchase plan. On December 21, 2005, our Board of Directors approved our eleventh stock repurchase plan authorizing the purchase, at management's discretion, of 10,000,000 shares, or approximately 10% of our common stock outstanding, through December 31, 2007 in open-market or privately negotiated transactions. Stock repurchases under our eleventh stock repurchase plan commenced immediately following the completion of the tenth stock repurchase plan on January 10, 2006. On October 1, 2003 we redeemed all of our outstanding shares of 12% Noncumulative Perpetual Preferred Stock, Series B, or Series B Preferred Stock, at a redemption price of $54.5 million plus accrued and unpaid dividends up to the redemption date. The Series B Preferred Stock had a par value of $1.00 per share and a liquidation preference of $25.00 per share. In 1996, we adopted a Stockholders Rights Plan, or the Rights Plan, and declared a dividend of one preferred share purchase right, or Right, for each outstanding share of our common stock. Each Right, initially, will entitle stockholders to buy a one one-hundredth interest in a share of a new series of our preferred stock at an exercise price of $100.00 upon the occurrence of certain events described in the Rights Plan. We have reserved 1,800,000 shares of our Series A Preferred Stock for the Rights Plan. Unless extended by the Board of Directors, the Rights Plan is scheduled to expire on September 3, 2006. We have a dividend reinvestment and stock purchase plan, or the Plan. Pursuant to the Plan, 300,000 shares of authorized and unissued common shares are reserved for use by the Plan, should the need arise. To date, all shares required by the Plan have been acquired in open market purchases. We are subject to the laws of the State of Delaware which generally limit dividends to an amount equal to the excess of our net assets (the amount by which total assets exceed total liabilities) over our statutory capital, or if there is no such excess, to our net profits for the current and/or immediately preceding fiscal year. Our ability to pay dividends, service our debt obligations and repurchase our common stock is dependent primarily upon receipt of dividend payments from Astoria Federal. The Office of Thrift Supervision, or OTS, regulates all capital distributions by Astoria Federal directly or indirectly to us, including dividend payments. Astoria Federal must file an application to receive the approval of the OTS for a proposed capital distribution if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years. Astoria Federal may not pay dividends to us if: (1) after paying those dividends, it would fail to meet applicable regulatory capital requirements; (2) the OTS notified Astoria Federal that it was in need of more than normal supervision; or (3) after making such distribution, the 99 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) institution would become "undercapitalized" (as such term is used in the Federal Deposit Insurance Act). Payment of dividends by Astoria Federal also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe and unsound banking practice. (10) Derivative Instruments As further discussed below, we use a variety of derivative instruments in connection with our overall interest rate risk management strategy. We are exposed to credit risk in the event of non-performance by counterparties to derivative instruments. In the event of default by a counterparty, we would be subject to an economic loss that corresponds to the cost to replace the agreement. We control the credit risk associated with our derivative instruments by dealing only with counterparties with the highest credit ratings, establishing counterparty exposure limits and monitoring procedures. Fair Value Hedges We have two interest swap agreements designated and accounted for as fair value hedges aggregating $125.0 million (notional amount) to effectively convert $125.0 million of our Junior Subordinated Debentures from a fixed to a variable rate instrument in order to protect the fair value of our Junior Subordinated Debentures due to changes in interest rates. These two interest rate swap agreements were entered into in 2002 as fair value hedges of the $125.0 million Capital Securities issued by Astoria Capital Trust I. As a result of our adoption of FIN 46(R), effective January 1, 2004, we redesignated these interest rate swap agreements as fair value hedges of the debt Astoria Financial Corporation issued to Astoria Capital Trust I. Under these agreements, we receive a fixed interest rate of 9.75% and pay a floating interest rate which is tied to the three-month LIBOR plus 400 basis points. The maturity dates, call features, deferral provisions and other critical terms of these derivative instruments match the terms of both the Capital Securities and the Junior Subordinated Debentures. No net gains or losses have been recognized in earnings with respect to these hedges. A $1.8 million liability was recorded at December 31, 2005 and a $1.4 million asset was recorded at December 31, 2004, which represent the fair value of the interest rate swap agreements as of those dates. A corresponding adjustment was made to the carrying amount of the Junior Subordinated Debentures to recognize the change in their fair value. See Note 8 for additional information regarding our Junior Subordinated Debentures. On March 8, 2006, we terminated our outstanding interest rate swap agreements at a cost of $5.5 million, pre-tax, which will be reflected in our consolidated results of operations for the quarter ending March 31, 2006. Free-Standing Derivative Instruments In connection with our mortgage banking activities, we had certain free-standing derivative instruments at December 31, 2005 and 2004. We had commitments to fund loans held-for-sale and commitments to sell loans which are considered derivative instruments under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The fair values of these derivative instruments are immaterial to our financial condition and results of operations. In 2002 and 2001 we purchased interest rate cap agreements as an economic hedge against rising interest rates and subsequent increases in our cost of funds. The interest rate cap agreements, which did not qualify for hedge accounting treatment, were included in other assets at their fair values. Changes in the fair values of the agreements were included in non-interest expense. The agreements, which had a total notional amount of $300.0 million, had various maturity dates from July 2004 to January 2005. The fair values of these agreements and changes therein were immaterial to our financial condition and results of operations in 2005, 2004 and 2003. Cash Flow Hedges In September 2002, in connection with our anticipated issuance of the 5.75% senior unsecured notes, we entered into an interest rate lock agreement designated and accounted for as a cash flow hedge of a forecasted transaction. The agreement was settled at the same time as the notes and the loss, net of tax, which is included in accumulated other comprehensive loss/income, is being reclassified into interest expense as a yield adjustment in the same periods in which the related interest on the 5.75% senior unsecured notes affects earnings. The remaining after-tax amount included in accumulated other comprehensive loss/income totaled $1.3 million at December 31, 2005 and $1.5 million at December 31, 2004. The after-tax amount to be reclassified into results of operations during 2006 totals $191,000. See Note 8 for additional information regarding our 5.75% senior unsecured notes. 100 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (11) Commitments and Contingencies Lease Commitments At December 31, 2005, we were obligated through 2035 under various non-cancelable operating leases on buildings and land used for office space and banking purposes. These operating leases contain escalation clauses which provide for increased rental expense, based primarily on increases in real estate taxes and cost-of-living indices. Rent expense under the operating leases totaled $7.8 million for the year ended December 31, 2005, $7.5 million for the year ended December 31, 2004 and $7.2 million for the year ended December 31, 2003. The minimum rental payments due under the terms of the non-cancelable operating leases as of December 31, 2005, which have not been reduced by minimum sublease rentals of $29.3 million due in the future under non-cancelable subleases, are summarized below: Year Amount -------------------------------------- (In Thousands) 2006 $ 7,267 2007 7,027 2008 6,601 2009 5,367 2010 4,775 2011 and thereafter 43,763 -------------------------------------- Total $ 74,800 ====================================== Outstanding Commitments We had outstanding commitments as follows: At December 31, ---------------------- (In Thousands) 2005 2004 - -------------------------------------------------------------------------------- Mortgage loans - commitments to extend credit (1) $ 470,388 $ 553,061 Mortgage loans - commitments to purchase 27,256 63,223 Home equity loans - unused lines of credit 362,107 328,510 Consumer and commercial loans - unused lines of credit 70,421 68,484 Commitments to sell loans 42,870 56,034 (1) Includes commitments to originate loans held-for-sale. Excluding commitments to originate loans held-for-sale, which are fixed rate loans, substantially all of the remaining mortgage loan commitments to extend credit are for ARM loans. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate creditworthiness on a case-by-case basis. Our maximum exposure to credit risk is represented by the contractual amount of the instruments. Assets Sold with Recourse We are obligated under various recourse provisions associated with certain first mortgage loans we sold in the secondary market. The principal balance of loans sold with recourse amounted to $596.7 million at December 31, 2005 and $565.8 million at December 31, 2004. We estimate the liability for loans sold with recourse based on an analysis of our loss experience related to similar loans sold with recourse. The carrying amount of this liability was immaterial at December 31, 2005 and 2004. We have collateralized repurchase obligations due to the sale of certain long-term fixed rate municipal revenue bonds and Federal Housing Administration project loans to investment trust funds for proceeds that approximated par value. The trust funds have put options that require us to repurchase the securities or loans for specified amounts prior to maturity under certain specified circumstances, as defined in the agreements. The outstanding option balance on the remaining agreements totaled $23.0 million at December 31, 2005 and $34.9 million at December 31, 101 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2004. Various GSE mortgage-backed securities, with an amortized cost of $36.3 million and a fair value of $36.9 million at December 31, 2005, have been pledged as collateral. Guarantees Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The guarantees generally extend for a term of up to one year and are fully collateralized. For each guarantee issued, if the customer defaults on a payment to the third party, we would have to perform under the guarantee. Outstanding standby letters of credit totaled $4.6 million at December 31, 2005 and $5.2 million at December 31, 2004. The fair value of these obligations is immaterial at December 31, 2005 and 2004. Litigation In the ordinary course of our business, we are routinely made defendant in or a party to a number of pending or threatened legal actions or proceedings which, in some cases, seek substantial monetary damages from or other forms of relief against us. In our opinion, after consultation with legal counsel, we believe it unlikely that such actions or proceedings will have a material adverse effect on our financial condition, results of operations or liquidity. We are a party to two actions pending in the U.S. Court of Federal Claims against the United States, involving assisted acquisitions made in the early 1980's and supervisory goodwill accounting utilized in connection therewith, which could result in a gain. The trial in one of the actions, which is entitled The Long Island Savings Bank, FSB et al vs. The United States, commenced on January 18, 2005 and concluded on July 7, 2005. We asked the Court to award damages totaling $594.0 million from the U.S. government for breach of contract in connection with a 1983 Assistance Agreement between the Long Island Savings Bank, FSB, which was acquired by us in 1998, and the Federal Savings and Loan Insurance Corporation. The Court rendered a decision on September 15, 2005 awarding us $435.8 million in damages from the U.S. government in this action. On December 14, 2005, the United States filed a notice of appeal. No assurance can be given as to the timing, content or ultimate outcome of any such appeal. No portion of the $435.8 million award has been recognized in our consolidated financial statements. Legal expense has been recognized as it was incurred. The other action, entitled Astoria Federal Savings and Loan Association vs. United States, has not yet been scheduled for trial. The Court is currently considering a summary judgment motion filed by the U.S. government. The ultimate outcomes of the two actions pending against the United States and the timing of such outcomes are uncertain and there can be no assurance that we will benefit financially from such litigation. On or about February 24, 2005, the Attorney General of the State of New York, or the Attorney General, served on Astoria Federal a subpoena duces tecum, or the Subpoena, seeking documents and information concerning, among other things, our contractual relationship with Independent Financial Marketing Group, Inc., or IFMG, IFMG Securities, Inc. and IFS Agencies, Inc., and the marketing and sale of Alternative Investment Products (i.e., financial products that are not bank instruments insured by the Federal Deposit Insurance Corporation, or FDIC). On several occasions thereafter in 2005, and again in January 2006, the Attorney General supplemented the Subpoena with requests for additional documents and information. Our arrangements with IFMG impose on IFMG compliance, disclosure and oversight-related obligations in connection with their sale of Alternative Investment Products to our customers at our branch locations. In this regard, we believe we are in full compliance with the Interagency Statement on Retail Sales of Nondeposit Investment Products issued by the federal bank regulatory authorities and Part 536 of the OTS Regulations regarding Consumer Protection in the Sale of Insurance. We are cooperating with the Attorney General's inquiry. No charges of wrongdoing on our part in connection with the sale of Alternative Investment Products have been filed by the Attorney General against us. Given the current status of the inquiry, no assurance can be given as to when the inquiry may be concluded, the ultimate result of the inquiry or any potential impact on our financial condition or results of operations. 102 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (12) Income Taxes Income tax expense is summarized as follows:
For the Year Ended December 31, ---------------------------------- (In Thousands) 2005 2004 2003 - ------------------------------------------------------------------------------------------------- Current Federal $ 114,606 $ 103,276 $ 93,383 State and local 6,103 6,688 5,107 - ------------------------------------------------------------------------------------------------- Total current 120,709 109,964 98,490 - ------------------------------------------------------------------------------------------------- Deferred Federal (1,316) (1,899) (547) State and local (951) (1,963) (1,567) - ------------------------------------------------------------------------------------------------- Total deferred (2,267) (3,862) (2,114) - ------------------------------------------------------------------------------------------------- Total income tax expense $ 118,442 $ 106,102 $ 96,376 =================================================================================================
Total income tax expense differed from the amounts computed by applying the federal income tax rate to income before income tax expense as a result of the following:
For the Year Ended December 31, ---------------------------------- (In Thousands) 2005 2004 2003 - ------------------------------------------------------------------------------------------------- Expected income tax expense at statutory federal rate $ 123,286 $ 113,974 $ 102,628 State and local taxes, net of federal tax benefit 3,349 3,071 2,301 Tax exempt income (principally on bank owned life insurance) (6,270) (6,791) (7,889) Reversal of deferred tax valuation allowance - - (3,396) Other, net (1,923) (4,152) 2,732 - ------------------------------------------------------------------------------------------------- Total income tax expense $ 118,442 $ 106,102 $ 96,376 =================================================================================================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
At December 31, ---------------------- (In Thousands) 2005 2004 - ------------------------------------------------------------------------------------- Deferred tax assets: Allowances and tax reserves $ 20,747 $ 20,732 Compensation and benefits 8,662 6,417 Tax credits 3,129 3,129 Mark-to-market elected for tax purposes 1,462 1,476 Net unrealized loss on securities available-for-sale 34,885 19,594 Unrealized loss on securities impairment write-down 6,895 6,895 Other 5,633 3,478 - ------------------------------------------------------------------------------------- Total gross deferred tax assets 81,413 61,721 - ------------------------------------------------------------------------------------- Deferred tax liabilities: Mortgage loans (13,701) (14,974) Premises and equipment (8,973) (7,016) Mortgage servicing rights (3,107) (1,285) - ------------------------------------------------------------------------------------- Total gross deferred tax liabilities (25,781) (23,275) - ------------------------------------------------------------------------------------- Net deferred tax assets $ 55,632 $ 38,446 =====================================================================================
We believe that our future results of operations and tax planning strategies will enable us to generate sufficient taxable income to enable us to realize our deferred tax assets. At December 31, 2005, we had alternative minimum tax credit carryforwards for federal tax purposes of approximately $3.1 million. Astoria Federal's retained earnings at December 31, 2005 and 2004 include base year bad debt reserves, which amounted to approximately $159.1 million, for which no federal income tax liability has been recognized. This represents the balance of the bad debt reserves created for tax purposes as of December 31, 1987. These amounts are subject to recapture in the unlikely event that Astoria Federal (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes, (2) redeems its stock, or (3) liquidates. 103 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (13) Earnings Per Share The following table is a reconciliation of basic and diluted EPS:
For the Year Ended December 31, ----------------------------------------------------------------------- 2005 2004 2003 ----------------------------------------------------------------------- Basic Diluted Basic Diluted Basic Diluted (In Thousands, Except Per Share Data) EPS EPS (1) EPS EPS (2) EPS EPS (3) - --------------------------------------------------------------------------------------------------------------------- Net income $ 233,803 $ 233,803 $ 219,537 $ 219,537 $ 196,846 $ 196,846 Preferred dividends declared - - - - (4,500) (4,500) - --------------------------------------------------------------------------------------------------------------------- Net income available to common shareholders $ 233,803 $ 233,803 $ 219,537 $ 219,537 $ 192,346 $ 192,346 ===================================================================================================================== Total weighted average basic common shares outstanding 101,476 101,476 107,931 107,931 114,575 114,575 Effect of dilutive securities: Options and unvested restricted stock - 1,933 - 1,876 - 1,367 - --------------------------------------------------------------------------------------------------------------------- Total weighted average diluted common shares outstanding 101,476 103,409 107,931 109,807 114,575 115,942 ===================================================================================================================== Net earnings per common share $ 2.30 $ 2.26 $ 2.03 $ 2.00 $ 1.68 $ 1.66 =====================================================================================================================
(1) Options to purchase 1,224,100 shares of common stock at $29.02 per share were outstanding as of December 31, 2005, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares for the year ended December 31, 2005. (2) Options to purchase 1,948,800 shares of common stock at $26.63 per share were outstanding as of December 31, 2004, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares for the year ended December 31, 2004. (3) Options to purchase 1,501,200 shares of common stock at prices between $19.92 per share and $24.40 per share were outstanding as of December 31, 2003, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares for the year ended December 31, 2003. 104 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (14) Comprehensive Income The components of accumulated other comprehensive loss at December 31, 2005 and 2004 and the changes during the year ended December 31, 2005 are as follows:
At Current At December 31, Period December 31, (In Thousands) 2004 Change 2005 - ---------------------------------------------------------------------------------------------------------------- Net unrealized loss on securities available-for-sale $ (27,013) $ (21,083) $ (48,096) Loss on cash flow hedge (1,489) 191 (1,298) Minimum pension liability adjustment (90) (52) (142) - ---------------------------------------------------------------------------------------------------------------- Accumulated other comprehensive loss $ (28,592) $ (20,944) $ (49,536) ================================================================================================================
The components of other comprehensive income, other than net income, for the years ended December 31, 2005, 2004 and 2003 are as follows:
Before Tax Tax After Tax (In Thousands) Amount Benefit (Expense) Amount - ---------------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 2005 Net unrealized holding losses on securities arising during the year $ (36,374) $ 15,291 $ (21,083) Reclassification adjustment for loss on cash flow hedge included in net income 330 (139) 191 Minimum pension liability adjustment (90) 38 (52) - ---------------------------------------------------------------------------------------------------------------- Other comprehensive loss $ (36,134) $ 15,190 $ (20,944) ================================================================================================================ For the Year Ended December 31, 2004 Net unrealized gains on securities available-for-sale: Net unrealized holding gains on securities arising during the year $ 18,755 $ (7,468) $ 11,287 Reclassification adjustment for net losses included in net income 11,869 (5,408) 6,461 ---------------------------------------------- 30,624 (12,876) 17,748 Reclassification adjustment for loss on cash flow hedge included in net income 329 (138) 191 Minimum pension liability adjustment (73) 31 (42) - ---------------------------------------------------------------------------------------------------------------- Other comprehensive income $ 30,880 $ (12,983) $ 17,897 ================================================================================================================ For the Year Ended December 31, 2003 Net unrealized losses on securities available-for-sale: Net unrealized holding losses on securities arising during the year $ (91,405) $ 39,111 $ (52,294) Reclassification adjustment for net gains included in net income (7,346) 2,414 (4,932) ---------------------------------------------- (98,751) 41,525 (57,226) Amortization of net unrealized loss on securities transferred to held-to-maturity 1,337 (562) 775 Reclassification adjustment for loss on cash flow hedge included in net income 330 (139) 191 Minimum pension liability adjustment (50) 21 (29) - ---------------------------------------------------------------------------------------------------------------- Other comprehensive loss $ (97,134) $ 40,845 $ (56,289) ================================================================================================================
105 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (15) Benefit Plans Pension Plans and Other Postretirement Benefits The following tables set forth information regarding our defined benefit pension plans and other postretirement benefit plan.
Other Postretirement Pension Benefits Benefits ----------------------------- ------------------------------ At or For the Year Ended At or For The Year Ended December 31, December 31, ----------------------------- ------------------------------ (In Thousands) 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------- ------------------------------ Change in benefit obligation: Benefit obligation at beginning of year $ 176,551 $ 165,494 $ 18,678 $ 16,386 Service cost 3,264 3,265 504 512 Interest cost 9,856 9,786 1,037 1,087 Amendments 1,318 - 943 - Actuarial loss 7,863 6,866 569 2,170 Benefits paid (8,833) (8,860) (1,276) (1,477) - ---------------------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year 190,019 176,551 20,455 18,678 - ---------------------------------------------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year 154,071 149,944 - - Actual return on plan assets 10,506 12,304 - - Employer contribution 691 683 1,276 1,477 Benefits paid (8,833) (8,860) (1,276) (1,477) - ---------------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year 156,435 154,071 - - - ---------------------------------------------------------------------------------------------------------------------------------- Funded status (33,584) (22,480) (20,455) (18,678) Unrecognized net actuarial loss (gain) 48,941 42,255 213 (356) Unrecognized prior service cost 1,791 694 1,026 124 - ---------------------------------------------------------------------------------------------------------------------------------- Net amount recognized $ 17,148 $ 20,469 $ (19,216) $ (18,910) ================================================================================================================================== Amounts recognized in the consolidated statements of financial condition: Prepaid benefit cost $ 34,360 $ 36,796 $ - $ - Accrued benefit liability (18,807) (16,620) (19,216) (18,910) Intangible asset 1,350 138 - - Accumulated other comprehensive loss (pre-tax basis) 245 155 - - - ---------------------------------------------------------------------------------------------------------------------------------- Net amount recognized $ 17,148 $ 20,469 $ (19,216) $ (18,910) ==================================================================================================================================
The accumulated benefit obligation for all defined benefit pension plans was $168.6 million at December 31, 2005 and $158.5 million at December 31, 2004. The measurement date for our defined benefit pension plans and other postretirement benefit plan is December 31. Assumptions used to determine the benefit obligation:
Rate of Discount Rate Compensation Increase -------------------- --------------------- 2005 2004 2005 2004 ---- ----- ----- ---- Pension Benefit Plans: Astoria Federal Pension Plan 5.50% 5.75% 5.00% 5.00% Astoria Federal Excess Benefit and Supplemental Benefit Plans 5.50 6.00 8.00 8.00 Astoria Federal Directors' Retirement Plan 5.50 6.00 4.00 4.00 The Greater Directors' Retirement Plan 5.50 6.00 N/A N/A Long Island Bancorp, Inc., or LIB, Directors' Retirement Plan 5.50 6.00 N/A N/A Other Postretirement Benefit Plan: Astoria Federal Retiree Health Care Plan 5.50 5.75 N/A N/A
106 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The components of net periodic cost are as follows:
Other Postretirement Pension Benefits Benefits ----------------------------------- ------------------------------------- For the Year Ended December 31, For the Year Ended December 31, ----------------------------------- ------------------------------------- (In Thousands) 2005 2004 2003 2005 2004 2003 - ------------------------------------------------------------------------------- ------------------------------------- Service cost $ 3,264 $ 3,265 $ 2,700 $ 504 $ 512 $ 360 Interest cost 9,856 9,786 9,570 1,037 1,087 995 Expected return on plan assets (11,974) (11,648) (9,956) - - - Amortization of prior service cost 221 161 160 41 41 40 Recognized net actuarial loss (gain) 2,645 2,540 3,368 - - (152) Amortization of transition asset - (35) (104) - - - - ------------------------------------------------------------------------------------------------------------------------- Net periodic cost $ 4,012 $ 4,069 $ 5,738 $1,582 $ 1,640 $ 1,243 =========================================================================================================================
Assumptions used to determine the net periodic cost:
Expected Return Rate of Discount Rate on Plan Assets Compensation Increase ------------------- -------------------- ----------------------- 2005 2004 2005 2004 2005 2004 ------ ------ ------ ------ ------ ------- Pension Benefit Plans: Astoria Federal Pension Plan 5.75% 6.00% 8.00% 8.00% 5.00% 5.00% Astoria Federal Excess Benefit and Supplemental Benefit Plans 6.00 6.00 N/A N/A 8.00 8.00 Astoria Federal Directors' Retirement Plan 6.00 6.00 N/A N/A 4.00 4.00 The Greater Directors' Retirement Plan 6.00 6.00 N/A N/A N/A N/A LIB Directors' Retirement Plan 6.00 6.00 N/A N/A N/A N/A Other Postretirement Benefit Plan: Astoria Federal Retiree Health Care Plan 5.75 6.00 N/A N/A N/A N/A
To determine the expected return on plan assets, we consider the long-term historical return information on plan assets, the mix of investments that comprise plan assets and the historical returns on indices comparable to the fund classes in which the plan invests. The assumed health care cost trend rates are as follows:
At December 31, ----------------------- 2005 2004 - -------------------------------------------------------------------------------------------------------- Health care cost trend rate assumed for next year 7.00% 7.50% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.00% 5.00% Year that the rate reaches the ultimate trend rate 2009 2009
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in assumed health care cost trend rates would have the following effects:
One Percentage One Percentage (In Thousands) Point Increase Point Decrease - --------------------------------------------------------------------------------------------------- Effect on total service and interest cost components $ 249 $ (193) Effect on the postretirement benefit obligation 2,418 (1,918)
We adopted FASB Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," or FSP No. 106-2, effective December 31, 2004. Upon adoption of FSP No. 106-2, we determined our other postretirement benefit plan (the Astoria Federal Retiree Health Care Plan) to be "actuarially equivalent," as defined, and determined the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or Medicare Act, were not a "significant event," as defined. The impact of our adoption of FSP No. 106-2 was a reduction of $850,000 in the accumulated postretirement benefit obligation at December 31, 2004. The reduction to the net periodic cost of our other postretirement benefit plan for 107 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) the year ended December 31, 2005 was immaterial to our financial condition and results of operations and there was no impact on the net periodic cost for the year ended December 31, 2004. At the end of 2005, the Astoria Federal Retiree Health Care Plan was changed to require Medicare-eligible retirees to enroll in a Medicare Part D equivalent prescription drug plan in order to maintain their prescription drug coverage under the Astoria Federal Retiree Health Care Plan. As a result, we will not be eligible to receive a federal subsidy for prescription drug costs for these retirees and there is no reduction for a federal subsidy in the accumulated postretirement benefit obligation at December 31, 2005. However, the accumulated postretirement benefit obligation at December 31, 2005 has been reduced to reflect the reduction in future prescription drug coverage premiums that we will recognize as a result of requiring our Medicare-eligible retirees to enroll in the Medicare Part D equivalent prescription drug plan offered by our insurance carrier. Included in the tables of pension benefits on pages 106 and 107 are the Astoria Federal Excess Benefit and Supplemental Benefit Plans, Astoria Federal Directors' Retirement Plan, The Greater Directors' Retirement Plan and the LIB Directors' Retirement Plan, which are unfunded plans. The projected benefit obligation and accumulated benefit obligation for these plans are as follows: At December 31, ------------------------------- (In Thousands) 2005 2004 - -------------------------------------------------------------------------------- Projected benefit obligation $22,304 $18,685 Accumulated benefit obligation 16,226 13,891 The following table sets forth the asset allocations, by asset category, for the Astoria Federal Pension Plan: Plan Assets At December 31, ------------------------------- 2005 2004 - -------------------------------------------------------------------------------- Asset Category: Equity securities (1) 14.53% 13.39% Other (2) 85.47 86.61 - -------------------------------------------------------------------------------- Total 100.00% 100.00% ================================================================================ (1) Equity securities include Astoria Financial Corporation common stock with a fair value of $22.7 million, or 14.5% of total plan assets, at December 31, 2005 and $20.6 million, or 13.4% of total plan assets, at December 31, 2004. (2) Primarily comprised of investments in various insurance company pooled separate accounts and trust company trust funds. The overall strategy of the Astoria Federal Pension Plan Investment Policy is to have a diverse portfolio that reasonably spans established risk/return levels, preserves liquidity and achieves the rate of return specified in the actuarial valuation. The strategy allows for a moderate risk approach in order to achieve greater long-term asset growth. The asset mix within the various insurance company pooled separate accounts and trust company trust funds can vary but should not be more than 80% in equity securities, 50% in debt securities, 25% in liquidity funds and 15% in Astoria Financial Corporation common stock. The Astoria Federal Pension Plan will not acquire Astoria Financial Corporation common stock to the extent that, after the acquisition, such common stock would represent more than 10% of total plan assets. Within equity securities, the mix is further clarified to have ranges not to exceed 10% in any one company, 30% in any one industry, 50% in funds that mirror the S&P 500, 50% in large-cap equity securities, 20% in mid-cap equity securities, 20% in small-cap equity securities and 10% in international equities. We expect to contribute $721,000 to our unfunded defined benefit pension plans and $1.1 million to our other postretirement benefit plan to cover expected benefit payments in 2006. Total benefits expected to be paid under our defined benefit pension plans and other postretirement benefit plan as of December 31, 2005, which reflect expected future service, as appropriate, are as follows: Pension Other Postretirement Year Benefits Benefits ---------------------------------------------------- (In Thousands) 2006 $ 9,335 $1,408 2007 9,419 1,386 2008 9,577 1,295 2009 10,082 1,289 2010 10,384 1,288 2011-2015 56,724 6,117 108 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Incentive Savings Plan Astoria Federal maintains a 401(k) incentive savings plan, or the 401(k) Plan, which provides for contributions by both Astoria Federal and its participating employees. Under the 401(k) Plan, which is a qualified, defined contribution pension plan, participants may contribute up to 15% of their pre-tax base salary, generally not to exceed $14,000 for the calendar year ended December 31, 2005. Matching contributions, if any, may be made at the discretion of Astoria Federal. No matching contributions were made for 2005, 2004 and 2003. Participants vest immediately in their own contributions and after a period of five years for Astoria Federal contributions. Employee Stock Ownership Plan Astoria Federal maintains an ESOP for its eligible employees, which is also a defined contribution pension plan. To fund the purchase of the ESOP shares, the ESOP borrowed funds from us. The ESOP loans bear an interest rate of 6.00%, mature on December 31, 2029 and are collateralized by our common stock purchased with the loan proceeds. Astoria Federal makes scheduled discretionary contributions to fund debt service. Astoria Federal's contributions, prior to 2010, may be reduced by dividends paid on unallocated shares and investment earnings realized on such dividends. Beginning in 2010, dividends paid on unallocated shares will be credited to participant accounts as investment earnings. Dividends paid on unallocated shares, which reduced Astoria Federal's contribution to the ESOP, totaled $5.4 million for the year ended December 31, 2005, $4.8 million for the year ended December 31, 2004 and $4.3 million for the year ended December 31, 2003. The ESOP loans had an aggregate outstanding principal balance of $32.9 million at December 31, 2005 and $33.8 million at December 31, 2004. Shares purchased by the ESOP are held in trust for allocation among participants as the loans are repaid. Pursuant to the loan agreements, the number of shares released annually is based upon a specified percentage of aggregate eligible payroll for our covered employees. Shares allocated to participants totaled 336,873 for the year ended December 31, 2005, 337,935 for the year ended December 31, 2004 and 387,657 for the year ended December 31, 2003. Through December 31, 2005, 8,603,289 shares have been allocated to participants. As of December 31, 2005, 6,465,273 shares which had a fair value of $190.1 million remain unallocated. In addition to shares allocated, Astoria Federal makes an annual cash contribution to participant accounts. This cash contribution totaled $2.4 million for the year ended December 31, 2005, $1.9 million for the year ended December 31, 2004 and $1.6 million for the year ended December 31, 2003, and will total not less than $1.2 million each year through 2009. Beginning in 2010, the only cash contributions Astoria Federal is required to make are to fund debt service. We recorded compensation expense relating to the ESOP of $11.6 million for the year ended December 31, 2005, $10.6 million for the year ended December 31, 2004 and $8.8 million for the year ended December 31, 2003, which was equal to the shares allocated by the ESOP multiplied by the average fair value of our common stock during the year of allocation, plus the cash contribution made to participant accounts. (16) Stock Incentive Plans In 2005, we adopted the 2005 Re-designated, Amended and Restated Stock Incentive Plan for Officers and Employees of Astoria Financial Corporation, or the 2005 Employee Stock Incentive Plan. In 1999, we adopted the 1999 Stock Option Plan for Outside Directors of Astoria Financial Corporation, or the 1999 Directors' Option Plan. As a result of the adoption of these plans, all previous employee and director option plans were frozen and no further option grants were made pursuant to those plans. The number of shares reserved for option, restricted stock and/or stock appreciation right grants was 5,250,000 under the 2005 Employee Stock Incentive Plan. The number of shares reserved for option grants was 525,000 under the 1999 Directors' Option Plan. At December 31, 2005, remaining shares available for issuance of future grants totaled 3,829,072 under the 2005 Employee Stock Incentive Plan and 123,000 under the 1999 Directors' Option Plan. Options and restricted stock granted under the 2005 Employee Stock Incentive Plan vest approximately three years after the grant date, with a maximum term of seven years for option grants. Options granted to employees under plans other than the 2005 Employee Stock Incentive Plan have a maximum term of ten years. Under plans involving grants of options or restricted stock to employees, in the event the grantee terminates his/her employment due to death, disability, retirement or in the event we experience a change in control, as defined and specified in such plans, all options and restricted stock granted immediately vest. Under plans involving grants to outside directors, all options granted have a maximum term of ten years and are exercisable immediately on their grant date. Options granted under all plans were granted in tandem with limited stock appreciation rights exercisable only in the event we experience a change in control, as defined by the plans. 109 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) On December 22, 2005, we accelerated the vesting of all outstanding unvested options which were granted to employees on December 17, 2003 and December 15, 2004 under the 2003 Employee Option Plan. On December 22, 2005 there were 1,402,950 unvested shares under the December 17, 2003 grants with an exercise price of $24.40 per share and a vest date of January 10, 2007 and 1,897,200 unvested shares under the December 15, 2004 grants with an exercise price of $26.63 and a vest date of January 10, 2008. The fair value of our stock on the effective date of the acceleration was $29.72 per share, therefore, these options were in-the-money at the time of the acceleration. We recognized pre-tax compensation expense in 2005 of $111,000 as a result of the accelerated vesting of these options. The purpose of the acceleration was to eliminate compensation expense associated with these options in future periods upon our adoption of SFAS No. 123(R) effective January 1, 2006. The accelerated vesting eliminates pre-tax compensation expense of approximately $10.4 million, which would have been recognized in future periods, including approximately $6.7 million in 2006. Subsequent to December 22, 2005, shares acquired through the exercise of options granted on December 17, 2003 or December 15, 2004 may not be sold prior to the earlier of the date the optionee terminates employment with us or the original vesting date. A number of the options which were accelerated were intended to qualify as incentive stock options when granted. The accelerated vesting disqualified most of such options from incentive stock option tax treatment. Upon the optionees' exercise of such disqualified options, we may realize certain tax benefits that would not have otherwise been available. In December 2005, 196,828 shares of restricted stock were granted to select officers with a fair value of $29.02 per share on the grant date. There was no other restricted stock activity for the years ended December 31, 2005, 2004 and 2003. Option activity in our stock incentive plans is summarized as follows:
For the Year Ended December 31, ---------------------------------------------------------------------- 2005 2004 2003 ---------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Number Exercise Number Exercise Number Exercise of Options Price of Options Price of Options Price - ------------------------------------------------------------------------------------------------------------ Outstanding at beginning of year 10,922,133 $ 19.02 10,345,493 $ 16.83 10,262,826 $ 14.32 Granted 1,284,100 28.89 2,014,800 26.55 1,529,700 24.10 Forfeited (29,250) (22.63) (47,400) (20.07) (8,190) (17.56) Exercised (1,048,283) (15.36) (1,390,760) (13.62) (1,438,843) (6.60) ---------- ---------- ---------- Outstanding at end of year 11,128,700 20.50 10,922,133 19.02 10,345,493 16.83 ========== ========== ========== Options exercisable at end of year 8,041,150 19.78 4,182,633 14.85 4,007,393 13.63
The following table summarizes information about our options outstanding at December 31, 2005:
Options Outstanding Options Exercisable ------------------------------------------------ ---------------------------- Weighted Weighted Weighted Number Average Remaining Average Number Average Exercise Prices of Options Contractual Life Exercise Price of Options Exercise Price - ------------------------------------------------------------------------------------------------------- $ 7.42 to $15.02 1,526,757 3.31 years $ 11.94 1,526,757 $ 11.94 16.27 to 17.49 2,573,444 5.36 16.69 2,565,944 16.69 18.00 to 19.92 2,370,149 6.11 18.25 514,199 19.13 24.17 to 24.40 1,466,100 7.96 24.39 1,466,100 24.39 26.23 to 26.63 1,968,150 8.96 26.61 1,968,150 26.61 29.02 1,224,100 6.97 29.02 - - ---------- --------- $ 7.42 to $29.02 11,128,700 6.40 20.50 8,041,150 19.78 ========== =========
110 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table summarizes the per share weighted-average fair value of options granted. The per share weighted-average fair value of options was calculated to determine the effect on net income and EPS if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. See Note 1(q) for an illustration of the effect on net income and EPS of the provisions of SFAS No. 123.
For the Year Ended December 31, ------------------------------------------------------------------------ 2005 2004 2003 ------------------------------------------------------------------------ Weighted Weighted Weighted Options Average Options Average Options Average Granted Fair Value Granted Fair Value Granted Fair Value - ------------------------------------------------------------------------------------------------ Employees 1,224,100 1,948,800 1,463,700 Outside directors 60,000 66,000 66,000 --------- --------- --------- 1,284,100 $4.83 2,014,800 $6.11 1,529,700 $6.06 ========= ===== ========= ===== ========= =====
The per share weighted-average fair value of option grants was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
For the Year Ended December 31, --------------------------------------- 2005 2004 2003 - -------------------------------------------------------------------------------- Dividend yield 3.27% 2.50% 2.43% Expected stock price volatility 21.28 25.17 28.81 Risk-free interest rate based upon equivalent-term U.S. Treasury rates 4.25 3.66 3.16 Expected option lives 4.47 years 5.97 years 5.96 years
The per share weighted-average fair value of options was calculated using the above assumptions, based on our analyses of our historical experience and our judgments regarding future option exercise experience and market conditions. The decrease in the weighted-average expected option lives from 2004 to 2005 reflects the anticipated effect of the shorter contractual term of seven years for the 2005 employee option grants compared to ten years for the 2004 employee option grants. These assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. The Black-Scholes option pricing model also contains certain inherent limitations when applied to options which are not immediately exercisable and are not traded on public markets. (17) Regulatory Matters Federal law requires that savings associations, such as Astoria Federal, maintain minimum capital requirements. These capital standards are required to be no less stringent than standards applicable to national banks. At December 31, 2005 and 2004, Astoria Federal was in compliance with all regulatory capital requirements. The following table sets forth the regulatory capital calculations for Astoria Federal.
At December 31, 2005 --------------------------------------------------------------------------- Capital Actual Excess (Dollars in Thousands) Requirement % Capital % Capital % - ---------------------------------------------------------------------------------------------------- Tangible $331,749 1.50% $1,444,407 6.53% $ 1,112,658 5.03% Leverage 884,665 4.00 1,444,407 6.53 559,742 2.53 Risk-based 974,327 8.00 1,525,566 12.53 551,239 4.53
At December 31, 2004 --------------------------------------------------------------------------- Capital Actual Excess (Dollars in Thousands) Requirement % Capital % Capital % - ---------------------------------------------------------------------------------------------------- Tangible $345,326 1.50% $1,379,088 5.99% $ 1,033,762 4.49% Leverage 920,869 4.00 1,379,088 5.99 458,219 1.99 Risk-based 939,958 8.00 1,461,870 12.44 521,912 4.44
Astoria Federal's Tier I risked-based capital ratio was 11.86% at December 31, 2005 and 11.74% at December 31, 2004. 111 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, established a system of prompt corrective action to resolve the problems of undercapitalized institutions. The regulators adopted rules which require them to take action against undercapitalized institutions, based upon the five categories of capitalization which FDICIA created: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." The rules adopted generally provide that an insured institution whose total risk-based capital ratio is 10% or greater, Tier 1 risk-based capital ratio is 6% or greater, leverage capital ratio is 5% or greater and is not subject to any written agreement, order, capital directive or prompt corrective action directive issued by the FDIC shall be considered a "well capitalized" institution. As of December 31, 2005 and 2004, Astoria Federal was a "well capitalized" institution. (18) Fair Value of Financial Instruments Estimated fair values of certain types of financial instruments are most commonly derived from quoted market prices available in formal trading marketplaces. In many cases, financial instruments we hold are not bought or sold in formal trading marketplaces. Accordingly, in cases where quoted market prices are not available, fair values are derived or estimated based on a variety of valuation techniques. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any possible tax ramifications, estimated transaction costs, or any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. Because no market exists for a certain portion of our financial instruments, fair value estimates are based on judgments regarding future loss experience, current economic conditions, risk characteristics, and other such factors. These estimates are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. For these reasons and others, the estimated fair value disclosures presented herein do not represent our entire underlying value. As such, readers are cautioned in using this information for purposes of evaluating our financial condition and/or value either alone or in comparison with any other company. The following table summarizes the carrying amounts and estimated fair values of our financial instruments.
At December 31, ----------------------------------------------------- 2005 2004 ----------------------------------------------------- Carrying Estimated Carrying Estimated (In Thousands) Amount Fair Value Amount Fair Value - ---------------------------------------------------------------------------------------------------------- Financial Assets: Repurchase agreements $ 182,803 $ 182,803 $ 267,578 $ 267,578 Securities available-for-sale 1,841,351 1,841,351 2,406,883 2,406,883 Securities held-to-maturity 4,730,953 4,627,013 6,302,936 6,306,760 FHLB-NY stock 145,247 145,247 163,700 163,700 Loans held-for-sale, net 23,651 23,657 23,802 23,813 Loans receivable, net 14,311,134 14,224,372 13,180,521 13,362,582 MSR, net 16,502 16,522 16,799 16,799 Interest rate swaps - - 1,365 1,365 Financial Liabilities: Deposits 12,810,455 12,769,948 12,323,257 12,378,720 Borrowings, net 7,937,526 8,008,328 9,469,835 9,652,910 Interest rate swaps 1,762 1,762 - -
Methods and assumptions used to estimate fair values are as follows: Repurchase agreements The carrying amounts of repurchase agreements approximate fair values since all mature in one month or less. Securities available-for-sale and held-to-maturity Fair values for securities are based on published or securities dealers' estimated market values. FHLB-NY stock The carrying amount of FHLB-NY stock equals cost. The fair value of FHLB-NY stock is based on redemption at par value. 112 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Loans held-for-sale, net Fair values of loans held-for-sale are estimated based on current secondary market prices for loans with similar terms. Loans receivable, net Fair values of loans are estimated by discounting the expected future cash flows of pools of loans with similar characteristics. The loans are first segregated by type, such as one-to-four family, multi-family, commercial real estate, construction and consumer and other, and then further segregated into fixed and adjustable rate and seasoned and nonseasoned categories. Expected future cash flows are then projected based on contractual cash flows, adjusted for prepayments. Prepayment estimates are based on a variety of factors including our experience with respect to each loan category, the effect of current economic and lending conditions and regional statistics for each loan category, if available. The discount rates used are based on market rates for new loans of similar type and purpose, adjusted, when necessary, for factors such as servicing cost, credit risk and term. As previously mentioned, this technique of estimating fair value is extremely sensitive to the assumptions and estimates used. While we have attempted to use assumptions and estimates which are the most reflective of the loan portfolio and the current market, a greater degree of subjectivity is inherent in determining these fair values than for fair values obtained from formal trading marketplaces. MSR, net The fair value of MSR is obtained through independent third party valuations through an analysis of future cash flows, incorporating numerous market based assumptions including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data. Interest rate swaps Fair values for interest rate swaps are based on securities dealers' estimated market values. Deposits The fair values of deposits with no stated maturity, such as savings accounts, NOW accounts, money market accounts and demand deposits, are equal to the amount payable on demand. The fair values of certificates of deposit and Liquid CDs are based on discounted contractual cash flows using rates which approximate the rates we offer for deposits of similar remaining maturities. Borrowings, net Fair value estimates are based on securities dealers' estimated market values, when available, or discounted contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities. Outstanding commitments Outstanding commitments include (1) commitments to extend credit and unadvanced lines of credit for which fair values were estimated based on an analysis of the interest rates and fees currently charged to enter into similar transactions, considering the remaining terms of the commitments and the creditworthiness of the potential borrowers and (2) commitments to sell residential mortgage loans for which fair values were estimated based on current secondary market prices for commitments with similar terms. Due to the short-term nature of our outstanding commitments, the fair values of these commitments are immaterial to our financial condition. 113 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (19) Condensed Parent Company Only Financial Statements The following condensed parent company only financial statements reflect our investments in our wholly-owned consolidated subsidiaries, Astoria Federal and AF Insurance Agency, Inc., using the equity method of accounting. Astoria Financial Corporation - Condensed Statements of Financial Condition
At December 31, ---------------------------------------- (In Thousands) 2005 2004 - ---------------------------------------------------------------------------------------------------------------- Assets: Cash $ - $ 1 Repurchase agreements 182,803 267,578 Other securities available-for-sale 127 133 ESOP loans receivable 32,881 33,796 Accrued interest receivable 104 78 Other assets 953 2,662 Investment in Astoria Federal 1,593,272 1,548,005 Investment in AF Insurance Agency, Inc. 3,565 2,641 Investment in Astoria Capital Trust I 3,929 3,929 - ---------------------------------------------------------------------------------------------------------------- Total assets $ 1,817,634 $ 1,858,823 ================================================================================================================ Liabilities and stockholders' equity: Other borrowings, net $ 433,526 $ 455,835 Other liabilities 7,917 6,161 Amounts due to subsidiaries 25,964 27,063 Stockholders' equity 1,350,227 1,369,764 - ---------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,817,634 $1,858,823 ================================================================================================================
Astoria Financial Corporation - Condensed Statements of Income
For the Year Ended December 31, --------------------------------------------- (In Thousands) 2005 2004 2003 - ---------------------------------------------------------------------------------------------------------------- Interest income: Repurchase agreements and other securities $ 6,130 $ 1,139 $ 1,500 ESOP loans receivable 2,027 2,079 2,140 - ---------------------------------------------------------------------------------------------------------------- Total interest income 8,157 3,218 3,640 Interest expense on borrowings 30,153 29,363 29,816 - ---------------------------------------------------------------------------------------------------------------- Net interest expense 21,996 26,145 26,176 - ---------------------------------------------------------------------------------------------------------------- Non-interest income 713 1,307 (1,074) Cash dividends from subsidiaries 200,000 522,470 120,000 - ---------------------------------------------------------------------------------------------------------------- Non-interest expense: Compensation and benefits 2,979 1,878 1,736 Other 2,901 7,132 2,323 - ---------------------------------------------------------------------------------------------------------------- Total non-interest expense 5,880 9,010 4,059 - ---------------------------------------------------------------------------------------------------------------- Income before income taxes and equity in undistributed (overdistributed) earnings of subsidiaries 172,837 488,622 88,691 Income tax benefit 11,238 14,028 12,970 - ---------------------------------------------------------------------------------------------------------------- Income before equity in undistributed (overdistributed) earnings of subsidiaries 184,075 502,650 101,661 Equity in undistributed (overdistributed) earnings of subsidiaries (1) 49,728 (283,113) 95,185 - ---------------------------------------------------------------------------------------------------------------- Net income $ 233,803 $ 219,537 $ 196,846 ================================================================================================================
(1) The equity in overdistributed earnings of subsidiaries for the year ended December 31, 2004 represents dividends paid to us in excess of our subsidiaries' 2004 earnings. 114 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Astoria Financial Corporation - Condensed Statements of Cash Flows
For the Year Ended December 31, --------------------------------------------- (In Thousands) 2005 2004 2003 - ---------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 233,803 $ 219,537 $ 196,846 Adjustments to reconcile net income to net cash provided by operating activities: Equity in (undistributed) overdistributed earnings of subsidiaries (49,728) 283,113 (95,185) (Increase) decrease in accrued interest receivable (26) (69) 13 Amortization of premiums and deferred costs 1,148 1,142 1,070 Decrease (increase) in other assets, net of other liabilities and amounts due to subsidiaries 578 434 (82) - ---------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 185,775 504,157 102,662 - ---------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Principal payments on ESOP loans receivable 915 924 942 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by investing activities 915 924 942 - ---------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Repayments of borrowings with original terms greater than three months (20,000) (20,000) - Common stock repurchased (180,944) (225,052) (195,471) Cash dividends paid to stockholders (86,625) (76,720) (76,370) Redemption of preferred stock - - (54,500) Cash received for options exercised 16,103 18,344 8,793 - ---------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (271,466) (303,428) (317,548) - ---------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (84,776) 201,653 (213,944) Cash and cash equivalents at beginning of year 267,579 65,926 279,870 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 182,803 $ 267,579 $ 65,926 ================================================================================================================ Supplemental disclosure: Cash paid during the year for interest $ 29,321 $ 28,733 $ 28,892 ================================================================================================================
115 QUARTERLY RESULTS OF OPERATIONS (Unaudited)
For the Year Ended December 31, 2005 ---------------------------------------------- First Second Third Fourth (In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------- Interest income $ 273,103 $ 270,210 $ 268,973 $ 270,701 Interest expense 147,890 148,863 150,437 157,017 - ----------------------------------------------------------------------------------------------------------- Net interest income 125,213 121,347 118,536 113,684 Provision for loan losses - - - - - ----------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 125,213 121,347 118,536 113,684 Non-interest income 24,742 22,526 28,372 26,559 - ----------------------------------------------------------------------------------------------------------- Total income 149,955 143,873 146,908 140,243 General and administrative expense 60,512 57,563 57,915 52,744 - ----------------------------------------------------------------------------------------------------------- Income before income tax expense 89,443 86,310 88,993 87,499 Income tax expense 29,964 28,914 29,814 29,750 - ----------------------------------------------------------------------------------------------------------- Net income $ 59,479 $ 57,396 $ 59,179 $ 57,749 =========================================================================================================== Basic earnings per common share $ 0.58 $ 0.56 $ 0.59 $ 0.58 Diluted earnings per common share $ 0.57 $ 0.55 $ 0.57 $ 0.57
For the Year Ended December 31, 2004 ---------------------------------------------- First Second Third Fourth (In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------- Interest income $ 261,094 $ 252,563 $ 264,080 $ 268,164 Interest expense 146,581 139,247 142,222 147,285 - ----------------------------------------------------------------------------------------------------------- Net interest income 114,513 113,316 121,858 120,879 Provision for loan losses - - - - - ----------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 114,513 113,316 121,858 120,879 Non-interest income 22,139 27,866 24,036 6,043 (1) - ----------------------------------------------------------------------------------------------------------- Total income 136,652 141,182 145,894 126,922 General and administrative expense 57,043 55,360 59,168 53,440 - ----------------------------------------------------------------------------------------------------------- Income before income tax expense 79,609 85,822 86,726 73,482 Income tax expense 26,196 28,321 28,619 22,966 - ----------------------------------------------------------------------------------------------------------- Net income $ 53,413 $ 57,501 $ 58,107 $ 50,516 =========================================================================================================== Basic earnings per common share $ 0.48 $ 0.53 $ 0.54 $ 0.48 Diluted earnings per common share $ 0.47 $ 0.52 $ 0.53 $ 0.48
(1) Includes a $16.5 million charge for an other-than-temporary securities impairment write-down. 116 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES INDEX OF EXHIBITS Exhibit No. Identification of Exhibit - ----------- ------------------------------------------------------------------ 3.1 Certificate of Incorporation of Astoria Financial Corporation, as amended effective as of June 3, 1998. (1) 3.2 Bylaws of Astoria Financial Corporation, as amended May 19, 2004. (2) 4.1 Astoria Financial Corporation Specimen Stock Certificate. (3) 4.2 Federal Stock Charter of Astoria Federal Savings and Loan Association. (4) 4.3 Bylaws of Astoria Federal Savings and Loan Association, as amended effective May 18, 2005. (5) 4.4 Amended and Restated Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock. (6) 4.5 Rights Agreement between Astoria Financial Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, dated as of July 17, 1996, as amended. (7) 4.6 Amendment No. 1 to Rights Agreement, dated as of April 2, 1998 by and between Astoria Financial Corporation and ChaseMellon Shareholder Services L.L.C. (8) 4.7 Amendment No. 2 to Rights Agreement, dated as of September 15, 1999 by and between Astoria Financial Corporation and ChaseMellon Shareholder Services L.L.C., as Rights Agent. (9) 4.8 Form of Rights Certificate. (7) 4.9 Indenture, dated as of October 28, 1999, between Astoria Financial Corporation and Wilmington Trust Company, as Debenture Trustee, including as Exhibit A thereto the Form of Certificate of Exchange Junior Subordinated Debentures. (10) 4.10 Form of Certificate of Junior Subordinated Debenture. (10) 4.11 Form of Certificate of Exchange Junior Subordinated Debenture. (10) 4.12 Amended and Restated Declaration of Trust of Astoria Capital Trust I, dated as of October 28, 1999. (10) 117 Exhibit No. Identification of Exhibit - ----------- ------------------------------------------------------------------ 4.13 Common Securities Guarantee Agreement of Astoria Financial Corporation, dated as of October 28, 1999. (10) 4.14 Form of Certificate Evidencing Common Securities of Astoria Capital Trust I. (10) 4.15 Form of Exchange Capital Security Certificate for Astoria Capital Trust I. (10) 4.16 Series A Capital Securities Guarantee Agreement of Astoria Financial Corporation, dated as of October 28, 1999. (10) 4.17 Form of Series B Capital Securities Guarantee Agreement of Astoria Financial Corporation. (10) 4.18 Form of Capital Security Certificate of Astoria Capital Trust I. (10) 4.19 Indenture between Astoria Financial Corporation and Wilmington Trust Company, as Debenture Trustee, dated as of October 16, 2002, relating to the Senior Notes due 2012. (11) 4.20 Form of 5.75% Senior Note due 2012, Series B. (11) 4.21 Astoria Financial Corporation Automatic Dividend Reinvestment and Stock Purchase Plan. (12) 10.1 Agreement dated as of December 28, 2000 by and between Astoria Federal Savings and Loan Association, Astoria Financial Corporation, the Astoria Federal Savings and Loan Association Employee Stock Ownership Plan Trust and The Long Island Savings Bank FSB Employee Stock Ownership Plan Trust. (4) 10.2 Amended and Restated Loan Agreement by and between Astoria Federal Savings and Loan Association Employee Stock Ownership Plan Trust and Astoria Financial Corporation made and entered into as of January 1, 2000. (4) 10.3 Promissory Note of Astoria Federal Savings and Loan Association Employee Stock Ownership Plan Trust dated January 1, 2000. (4) 10.4 Pledge Agreement made as of January 1, 2000 by and between Astoria Federal Savings and Loan Association Employee Stock Ownership Plan Trust and Astoria Financial Corporation. (4) 10.5 Amended and Restated Loan Agreement by and between The Long Island Savings Bank FSB Employee Stock Ownership Plan Trust and Astoria Financial Corporation made and entered into as of January 1, 2000. (4) 10.6 Promissory Note of The Long Island Savings Bank FSB Employee Stock Ownership Plan Trust dated January 1, 2000. (4) 118 Exhibit No. Identification of Exhibit - ----------- ------------------------------------------------------------------ 10.7 Pledge Agreement made as of January 1, 2000 by and between The Long Island Savings Bank FSB Employee Stock Ownership Plan Trust and Astoria Financial Corporation. (4) Exhibits 10.8 through 10.45 are management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K pursuant to Item 15(c) of this report. 10.8 Astoria Federal Savings and Loan Association and Astoria Financial Corporation Directors' Retirement Plan, as amended and restated effective January 1, 2005. (13) 10.9 The Long Island Bancorp, Inc., Non-Employee Director Retirement Benefit Plan, as amended. (14) 10.10 Astoria Financial Corporation Death Benefit Plan for Outside Directors. (3) 10.11 Deferred Compensation Plan for Directors of Astoria Financial Corporation. (3) 10.12 1996 Stock Option Plan for Officers and Employees of Astoria Financial Corporation, as amended December 29, 2005. (*) 10.13 1996 Stock Option Plan for Outside Directors of Astoria Financial Corporation, as amended December 29, 2005. (*) 10.14 1999 Stock Option Plan for Officers and Employees of Astoria Financial Corporation, as amended December 29, 2005. (*) 10.15 1999 Stock Option Plan for Outside Directors of Astoria Financial Corporation, as amended December 29, 2005. (*) 10.16 2003 Stock Option Plan for Officers and Employees of Astoria Financial Corporation, as amended December 29, 2005. (*) 10.17 2005 Re-designated, Amended and Restated Stock Incentive Plan for Officers and Employees of Astoria Financial Corporation. (15) 10.18 Astoria Federal Savings and Loan Association Annual Incentive Plan for Select Executives. (14) 10.19 Astoria Financial Corporation Executive Officer Annual Incentive Plan, as amended. (17) 10.20 Astoria Financial Corporation Amended and Restated Employment Agreement with George L. Engelke, Jr., dated as of January 1, 2000. (18) 119 Exhibit No. Identification of Exhibit - ----------- ------------------------------------------------------------------ 10.21 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with George L. Engelke, Jr., dated as of January 1, 2000. (18) 10.22 Astoria Financial Corporation Amended and Restated Employment Agreement with Gerard C. Keegan, dated as of January 1, 2000. (18) 10.23 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with Gerard C. Keegan, dated as of January 1, 2000. (18) 10.24 Employment Termination and Release Agreement by and among John J. Conefry, Jr., Astoria Federal Savings and Loan Association and Astoria Financial Corporation. (4) 10.25 Astoria Financial Corporation Amended and Restated Employment Agreement with Arnold K. Greenberg dated as of January 1, 2000. (18) 10.26 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with Arnold K. Greenberg, dated as of January 1, 2000. (18) 10.27 Astoria Financial Corporation Employment Agreement with Gary T. McCann, dated as of December 1, 2003. (3) 10.28 Astoria Federal Savings and Loan Association Employment Agreement with Gary T. McCann, dated as of December 1, 2003. (3) 10.29 Astoria Financial Corporation Amended and Restated Employment Agreement with Monte N. Redman dated as of January 1, 2000. (18) 10.30 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with Monte N. Redman, dated as of January 1, 2000. (18) 10.31 Astoria Financial Corporation Amended and Restated Employment Agreement with Alan P. Eggleston dated as of January 1, 2000. (18) 10.32 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with Alan P. Eggleston, dated as of January 1, 2000. (18) 10.33 Change of Control Severance Agreement, dated as of January 1, 2000, by and among Astoria Federal Savings and Loan Association, Astoria Financial Corporation and Josie Callari. (18) 10.34 Change of Control Severance Agreement, dated as of January 1, 2000, by and among Astoria Federal Savings and Loan Association, Astoria Financial Corporation and Robert J. DeStefano. (18) 120 Exhibit No. Identification of Exhibit - ----------- ------------------------------------------------------------------ 10.35 Change of Control Severance Agreement, dated as of January 1, 2000, by and among Astoria Federal Savings and Loan Association, Astoria Financial Corporation and Frank E. Fusco. (18) 10.36 Change of Control Severance Agreement, dated as of January 1, 2000, by and among Astoria Federal Savings and Loan Association, Astoria Financial Corporation and Robert T. Volk. (18) 10.37 Change of Control Severance Agreement, dated as of January 1, 2000, by and among Astoria Federal Savings and Loan Association, Astoria Financial Corporation and Ira M. Yourman. (18) 10.38 Change of Control Severance Agreement, dated as of December 20, 2000, by and among Astoria Federal Savings and Loan Association, Astoria Financial Corporation and Brian T. Edwards. (4) 10.39 Change of Control Severance Agreement, dated as of December 21, 2005, by and among Astoria Federal Savings and Loan Association, Astoria Financial Corporation and Anthony S. DiCostanzo. (*) 10.40 Change of Control Severance Agreement, dated as of December 21, 2005, by and among Astoria Federal Savings and Loan Association, Astoria Financial Corporation and Thomas E. Lavery. (*) 10.41 Change of Control Severance Agreement, dated as of December 21, 2005, by and among Astoria Federal Savings and Loan Association, Astoria Financial Corporation and William J. Mannix. (*) 10.42 Retirement Medical and Dental Benefit Policy for Senior Officers. (16) 10.43 Form of Option Conversion Agreement by and between Astoria Financial Corporation and Former Officer or Director of Long Island Bancorp, Inc. dated September 30, 1998. (19) 10.44 Option Conversion Certificates of Robert J. Conway and Leo J. Waters. (14) 10.45 Trust Agreement, dated as of January 31, 1995 between Astoria Financial Corporation and State Street Bank and Trust Company. (3) 12.1 Statement regarding computation of ratios. (*) 21.1 Subsidiaries of Astoria Financial Corporation. (*) 23.1 Consent of Independent Registered Public Accounting Firm. (*) 31.1 Certifications of Chief Executive Officer. (*) 31.2 Certifications of Chief Financial Officer. (*) 121 Exhibit No. Identification of Exhibit - ----------- ------------------------------------------------------------------ 32.1 Written Statement of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. (*) 32.2 Written Statement of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. (*) 99.1 Proxy Statement for the Annual Meeting of Shareholders to be held on May 17, 2006, which will be filed with the SEC within 120 days from December 31, 2005, is incorporated herein by reference. - ---------- * Filed herewith. Copies of exhibits will be provided to shareholders upon written request to Astoria Financial Corporation, Investor Relations Department, One Astoria Federal Plaza, Lake Success, New York 11042 at a charge of $0.10 per page. Copies are also available at no charge through the SEC website at www.sec.gov/edgar/searchedgar/webusers.htm. (1) Incorporated by reference to Astoria Financial Corporation's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1998, filed with the Securities and Exchange Commission on September 10, 1998 (File Number 000-22228). (2) Incorporated by reference to Astoria Financial Corporation's Current Report on Form 8-K, dated May 19, 2004, filed with the Securities and Exchange Commission on May 19, 2004 (File Number 001-11967). (3) Incorporated by reference to Astoria Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on March 12, 2004 (File Number 001-11967). (4) Incorporated by reference to Astoria Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, filed with the Securities and Exchange Commission on March 26, 2001 (File Number 000-22228). (5) Incorporated by reference to Astoria Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 9, 2005 (File Number 001-11967). (6) Incorporated by reference to Astoria Financial Corporation's Current Report on Form 8-K, dated February 9, 2005, filed with the Securities and Exchange Commission on February 10, 2005 (File Number 001-11967). (7) Incorporated by reference to Astoria Financial Corporation's Registration Statement on Form 8-K/A dated July 17, 1996, filed with the Securities and Exchange Commission on July 23, 1996 (File Number 000-22228). 122 (8) Incorporated by reference to Astoria Financial Corporation's Current Report on Form 8-K/A, dated April 2, 1998, filed with the Securities and Exchange Commission on April 10, 1998 (File Number 000-22228), as amended by the First Amendment, incorporated by reference to the Registrant's Current Report on Form 8-K, dated May 29, 1998 (File Number 000-22228) and the Second Amendment, incorporated by reference to the Registrant's Current Report on Form 8-K, dated July 10, 1998 (File Number 000-22228). (9) Incorporated by reference to Astoria Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed with the Securities and Exchange Commission on November 12, 1999 (File Number 000-22228). (10) Incorporated by reference to Form S-4 Registration Statement, filed with the Securities and Exchange Commission on February 18, 2000 (File Number 333-30792). (11) Incorporated by reference to Form S-4 Registration Statement, filed with the Securities and Exchange Commission on December 6, 2002 (File Number 333-101694). (12) Incorporated by reference to Form 424B3 Prospectus Supplement, filed with the Securities and Exchange Commission on February 1, 2000 (File Number 033-98532). (13) Incorporated by reference to Astoria Financial Corporation's Current Report on Form 8-K, dated December 21, 2005, filed with the Securities and Exchange Commission on December 22, 2005 (File Number 001-11967). (14) Incorporated by reference to Astoria Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed with the Securities and Exchange Commission on March 24, 1999 (File Number 000-22228). (15) Incorporated by reference to Astoria Financial Corporation's Schedule 14A Definitive Proxy Statement filed on April 11, 2005 (File Number 001-11967). (16) Incorporated by reference to Astoria Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, filed with the Securities and Exchange Commission on March 25, 1998 (File Number 000-22228). (17) Incorporated by reference to Astoria Financial Corporation's Schedule 14A Definitive Proxy Statement filed on April 16, 2004 (File Number 001-11967). (18) Incorporated by reference to Astoria Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, filed with the Securities and Exchange Commission on March 24, 2000 (File Number 000-22228). (19) Incorporated by reference to Astoria Financial Corporation's Registration Statement on Form S-8, dated September 30, 1998, filed with the Securities and Exchange Commission on September 30, 1998 (File Number 333-64895). 123 EX-10 2 ex10-12.txt EXHIBIT 10.12 Exhibit 10.12 1996 Stock Option Plan for Officers and Employees of Astoria Financial Corporation (As amended December 17, 1997) (As amended December 29, 2005) ARTICLE I PURPOSE Section 1.1 General Purpose of the Plan. The purpose of the Plan is to promote the growth and profitability of Astoria Financial Corporation, to provide certain key officers and employees of Astoria Financial Corporation and affiliates with an incentive to achieve corporate objectives, to attract and retain key individuals of outstanding competence and to provide such individuals with an equity interest in Astoria Financial Corporation. ARTICLE II DEFINITIONS The following definitions shall apply for the purposes of this Plan, unless a different meaning is plainly indicated by the context: Section 2.1 Association means Astoria Federal Savings and Loan Association, a federally chartered savings institution, and any successor thereto. Section 2.2 Board means the board of directors of Astoria Financial Corporation. Section 2.3 Change in Control of the Company means any of the following events: (a) approval by the stockholders of Astoria Financial Corporation of a transaction that would result in the reorganization, merger or consolidation of Astoria Financial Corporation with one or more other persons, other than a transaction following which: (i) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in Astoria Financial Corporation; and (ii) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to 1 such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of Astoria Financial Corporation; (b) the acquisition of all or substantially all of the assets of Astoria Financial Corporation or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the outstanding securities of Astoria Financial Corporation entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the stockholders of Astoria Financial Corporation of any transaction which would result in such an acquisition; (c) a complete liquidation or dissolution of Astoria Financial Corporation, or approval by the stockholders of Astoria Financial Corporation of a plan for such liquidation or dissolution; (d) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board of Directors of Astoria Financial Corporation do not belong to any of the following groups: (i) individuals who were members of the Board of Directors of Astoria Financial Corporation on the date of this Agreement; or (ii) individuals who first became members of the Board of Directors of Astoria Financial Corporation after the date of this Agreement either: (A) upon election to serve as a member of the Board of Directors of Astoria Financial Corporation by affirmative vote of three-quarters of the members of such Board, or of a nominating committee thereof, in office at the time of such first election; or (B) upon election by the stockholders of Astoria Financial Corporation to serve as a member of the Board of Astoria Financial Corporation, but only if nominated for election by affirmative vote of three-quarters of the members of the Board of Directors of Astoria Financial Corporation, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of Astoria Financial Corporation; or (e) any event which would be described in section 2.3(a), (b), (c) or (d) if the term "Association" were substituted for the term "Company" therein. 2 In no event, however, shall a Change in Control be deemed to have occurred as a result of any acquisition of securities or assets of Astoria Financial Corporation, the Association, or a subsidiary of either of them, by Astoria Financial Corporation, the Association, or a subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this section 2.3, the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. Section 2.4 Code means the Internal Revenue Code of 1986 (including the corresponding provisions of any succeeding law). Section 2.5 Committee means the Committee described in section 3.1. Section 2.6 Company means Astoria Financial Corporation, a corporation organized and existing under the laws of the State of Delaware, and any successor thereto, the Association and any successor thereto and, with the prior approval of the Board, and subject to such terms and conditions as may be imposed by the Board, any other savings bank, savings and loan association, bank, corporation, financial institution or other business organization or institution. Section 2.7 Disability means a condition of total incapacity, mental or physical, for further performance of duty with the Company which the Committee shall have determined, on the basis of competent medical evidence, is likely to be permanent. Section 2.8 Disinterested Board Member means a member of the Board who (a) is not a current employee of the Company, (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year, (c) has not been an officer of the Company, (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director and (e) is not currently and for a period of at least one year has not been eligible for discretionary awards under any stock compensation plan of the Company. The term Disinterested Board Member shall be interpreted in such manner as shall be necessary to conform to the requirements of section 162(m) of the Code and Rule 16b-3 promulgated under the Exchange Act. Section 2.9 Eligible Individual means any individual whom the Committee may determine to be a key officer or employee of the Company and select to receive a grant of an Option pursuant to the Plan. Section 2.10 Exchange Act means the Securities Exchange Act of 1934. Section 2.11 Exercise Price means the price per Share at which Shares subject to an Option may be purchased upon exercise of the Option, determined in accordance with section 4.4. Section 2.12 Fair Market Value means, with respect to a Share on a specified date: (a) the final quoted sales price on the date in question (or if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) as reported in the principal consolidated reporting system with respect to securities listed or admitted to trading on the principal United States securities exchange on which the Shares are listed or admitted to trading; or 3 (b) if the Shares are not listed or admitted to trading on any such exchange, the closing bid quotation with respect to a Share on such date on the National Association of Securities Dealers Automated Quotations System, or, if no such quotation is provided, on another similar system, selected by the Committee, then in use; or (c) if sections 2.12(a) and (b) are not applicable, the fair market value of a Share as the Committee may determine. Section 2.13 Incentive Stock Option means a right to purchase Shares that is granted pursuant to section 4.1, that is designated by the Committee to be an Incentive Stock Option and that is intended to satisfy the requirements of section 422A of the Code. Section 2.14 Limited Stock Appreciation Right means a right granted pursuant to section 4.9. Section 2.15 Non-Qualified Stock Option means a right to purchase Shares that is granted pursuant to section 4.1, that is designated by the Committee to be a Non-Qualified Stock Option and that is not intended to satisfy the requirements of section 422A of the Code. Section 2.16 Option means either an Incentive Stock Option or a Non-Qualified Stock Option. Section 2.17 Option Period means the period during which an Option may be exercised, determined in accordance with section 4.5. Section 2.18 Person means an individual, a corporation, a bank, a savings bank, a savings and loan association, a financial institution, a partnership, an association, a joint-stock company, a trust, an estate, an unincorporated organization and any other business organization or institution. Section 2.19 Plan means the 1996 Stock Option Plan for Officers and Employees of Astoria Financial Corporation, as amended from time to time. Section 2.20 Qualified Domestic Relations Order means a Domestic Relations Order that: (a) clearly specifies (i) the name and last known mailing address of the Option holder and of each person given rights under such Domestic Relations Order, (ii) the amount or percentages of the Option holder's benefits under this Plan to be paid to each person covered by such Domestic Relations Order, (iii) the number of payments or the period to which such Domestic Relations Order applies, and (iv) the name of this Plan; and (b) does not require the payment of a benefit in a form or amount that is (i) not otherwise provided for under the Plan, or (ii) inconsistent with a previous Qualified Domestic Relations Order. For the purposes of this Plan, a "Domestic Relations Order" means a judgment, decree or order (including the approval of a property settlement) that is made pursuant to a state domestic relations or community property law and relates to the provision of child support, alimony payments, or marital property rights to a spouse, child or other dependent of an Option holder. Section 2.21 Retirement means retirement at the normal or early retirement date as set forth in any tax-qualified retirement/pension plan of the Association. 4 Section 2.22 Share means a share of Common Stock, par value $.01 per share, of Astoria Financial Corporation. Section 2.23 Termination for Cause means the termination upon an intentional failure to perform stated duties, breach of a fiduciary duty involving personal dishonesty, which results in material loss to the Company or one of its affiliates or willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final case-and-desist order which results in material loss to the Company or one of its affiliates. Section 2.24 Threatened Change in Control means (a) the circulation of a proxy statement by any Person other than management of Astoria Financial Corporation seeking stockholder approval of a transaction that would result in a Change in Control of the Company or (b) the commencement of a tender offer (within the meaning of section 14 of the Exchange Act) which, if consummated, would result in a Change in Control of the Company. ARTICLE III ADMINISTRATION Section 3.1 Committee. The Plan shall be administered by a Committee consisting of the members of the Compensation Committee of Astoria Financial Corporation who are Disinterested Board Members. If fewer than three members of the Compensation Committee are Disinterested Board Members, then the Board shall appoint to the Committee such additional Disinterested Board Members as shall be necessary to provide for a Committee consisting of at least three Disinterested Board Members. Section 3.2 Committee Action. The Committee shall hold such meetings, and may make such administrative rules and regulations, as it may deem proper. A majority of the members of the Committee shall constitute a quorum, and the action of a majority of the members of the Committee present at a meeting at which a quorum is present, as well as actions taken pursuant to the unanimous written consent of all of the members of the Committee without holding a meeting, shall be deemed to be actions of the Committee. All actions of the Committee shall be final and conclusive and shall be binding upon the Company and all other interested parties. Any Person dealing with the Committee shall be fully protected in relying upon any written notice, instruction, direction or other communication signed by the secretary of the Committee and one member of the Committee, by two members of the Committee or by a representative of the Committee authorized to sign the same in its behalf. Section 3.3 Committee Responsibilities. Subject to the terms and conditions of the Plan and such limitations as may be imposed from time to time by the Board, the Committee shall be responsible for the overall management and administration of the Plan and shall have such authority as shall be necessary or appropriate in order to carry out its responsibilities, including, without limitation, the authority: (a) to interpret and construe the Plan, and to determine all questions that may arise under the Plan as to eligibility for participation in the Plan, the number of Shares subject to the Options, if any, to be granted, and the terms and conditions thereof; 5 (b) to adopt rules and regulations and to prescribe forms for the operation and administration of the Plan; and (c) to take any other action not inconsistent with the provisions of the Plan that it may deem necessary or appropriate. ARTICLE IV STOCK OPTIONS Section 4.1 In General. Subject to the limitations of the Plan, the Committee may, in its discretion, grant to an Eligible Individual an Option to purchase Shares. Any such Option shall be evidenced by a written agreement which shall: (a) designate the Option as either an Incentive Stock Option or a Non-Qualified Stock Option; (b) specify the number of Shares covered by the Option; (c) specify the Exercise Price, determined in accordance with section 4.4, for the Shares subject to the Option; (d) specify the Option Period determined in accordance with section 4.5; (e) set forth specifically or incorporate by reference the applicable provisions of the Plan; and (f) contain such other terms and conditions not inconsistent with the Plan as the Committee may, in its discretion, prescribe with respect to an Option granted to an Eligible Individual. Section 4.2 Available Shares. Subject to section 5.3, the maximum aggregate number of Shares with respect to which Options may be granted at any time shall be equal to the excess of: (a) 475,000 Shares; over (b) the sum of: (i) the number of Shares with respect to which previously granted Options may then or may in the future be exercised; plus (ii) the number of Shares with respect to which previously granted Options have been exercised. For purposes of this section 4.2, an Option shall not be considered as having been exercised to the extent that such Option terminates by reason other than the purchase of the related Shares. 6 Section 4.3 Size of Option. Subject to section 4.2 and such limitations as the Board may from time to time impose, the number of Shares as to which an Eligible Individual may be granted Options shall be determined by the Committee, in its discretion. The maximum number of Shares that may be granted to any one individual under this Plan shall be the entire number of Shares then available under the Plan. Section 4.4 Exercise Price. The price per Share at which an Option granted to an Eligible Individual may be exercised shall be determined by the Committee, in its discretion; provided, however, that the Exercise Price shall not be less than (a) the Fair Market Value of a Share on the date on which the Option is granted and (b) in the case of an Option intended to be an Incentive Stock Option that is granted to an Eligible Individual who, at the time the Option is granted, owns Shares comprising more than 10% of the total combined voting power of all classes of stock of the Company, shall not be less than 110% of the Fair Market Value of a Share. Section 4.5 Option Period. The Option Period during which an Option granted to an Eligible Individual may be exercised shall commence on the date specified by the Committee in the Option agreement and shall expire on the earliest of: (a) the date specified by the Committee in the Option agreement; (b) the last day of the three-month period commencing on the date of the Eligible Individual's termination of employment with the Company, other than on account of death or Disability, Retirement or a Termination for Cause; (c) the last day of the one-year period commencing on the date of the Eligible Individual's termination of employment due to death, Disability or Retirement; (d) as of the time and on the date the Eligible Individual ceases to be an employee of the Company due to a Termination for Cause; (e) the last day of the ten-year period commencing on the date on which the Option was granted; and (f) for an Option intended to be an Incentive Stock Option that is granted to an Eligible Individual who, at the time the Option is granted, owns Shares comprising more than 10% of the total combined voting power of all classes of stock of the Company, the last day of the five-year period commencing on the date on which the Option was granted; provided, however, that in the event of a Threatened Change in Control or a Change in Control of the Company while there is outstanding any Option whose Option Period has not commenced, such Option Period shall automatically commence on the earliest date on which the Threatened Change in Control or Change in Control of the Company is deemed to have occurred. Section 4.6 Method of Exercise. (a) Subject to the limitations of the Plan and the Option agreement, an Option holder may, at any time during the Option Period, exercise his right to purchase all or any part of the Shares to which the 7 Option relates; provided, however, that the minimum number of Shares which may be purchased shall be 100, or, if less, the total number of Shares relating to the Option which remain unpurchased. An Option holder shall exercise an Option to purchase Shares by: (i) giving written notice to the Committee, in such form and manner as the Committee may prescribe, of his intent to exercise the Option; (ii) delivering to the Committee full payment, consistent with section 4.6(b), for the Shares as to which the Option is to be exercised; and (iii) satisfying such other conditions as may be prescribed in the Option agreement. (b) The Exercise Price of Shares to be purchased upon exercise of any Option shall be paid in full in cash (by certified or bank check or such other instrument as the Company may accept) or, if and to the extent permitted by the Committee, by one or more of the following: (i) in the form of Shares already owned beneficially for a period of more than six months by the Option Holder having an aggregate Fair Market Value on the date the Option is exercised equal to the aggregate Exercise Price to be paid; (ii) after a period of six months from the date of grant of any such Option, by requesting the Company to cancel without payment Options outstanding to such Person for that number of Shares whose aggregate Fair Market Value on the date of exercise, when reduced by their aggregate Exercise Price, equals the aggregate Exercise Price of the Options being exercised; or (iii) by a combination thereof. Payment for any Shares to be purchased upon exercise of an Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. (c) When the requirements of section 4.6(a) and (b) have been satisfied, the Committee shall take such action as is necessary to cause the issuance of a stock certificate evidencing the Option holder's ownership of such Shares. The Person exercising the Option shall have no right to vote or to receive dividends, nor have any other rights with respect to the Shares, prior to the date as of which such Shares are transferred to such Person on the stock transfer records of the Company, and no adjustments shall be made for any dividends or other rights for which the record date is prior to the date as of which such transfer is effected, except as may be required under section 5.3. Section 4.7 Limitations on Options. (a) An Option by its terms shall not be transferable by the Option holder other than by will or the laws of descent and distribution, or pursuant to the terms of a Qualified Domestic Relations Order, and shall be exercisable, during the life of the Option holder, only by the Option holder or an alternate payee designated pursuant to such a Qualified Domestic Relations Order; provided, however, that an Eligible Individual may, at any time at or after the grant of a Non-Qualified Stock Option under the Plan, apply to the Committee for approval to transfer all or any portion of such Non-Qualified Stock Option which is then unexercised to such Eligible Individual's spouse, and the lineal ascendents and lineal descendants of such Eligible Individual or his spouse, or any one or more of them, or to an entity wholly owned by (including but not limited to a trust the exclusive beneficiaries of which are) one or more of them or wholly owned jointly by one or more of them and the Eligible Individual. The Committee may approve or withhold approval of such transfer in its sole and absolute discretion. If such transfer is approved, it shall be effected by written 8 notice to the Company given in such form and manner as the Committee may prescribe and actually received by the Company prior to the death of the person giving it. Thereafter, the transferee shall have with respect to such Non-Qualified Stock Option, all of the rights, privileges and obligations which would attach thereunder to the transferor. If a privilege of the Option depends on the life, employment or other status of the transferor, such privilege of the Option for the transferee shall continue to depend upon the life, employment or other status of the transferor. The Committee shall have full and exclusive authority to interpret and apply the provisions of the Plan to transferees to the extent not specifically addressed herein. (b) The Company's obligation to deliver Shares with respect to an Option shall, if the Committee so requests, be conditioned upon the receipt of a representation as to the investment intention of the Option holder to whom such Shares are to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply with the provisions of applicable federal, state or local law. It may be provided that any such representation shall become inoperative upon a registration of the Shares or upon the occurrence of any other event eliminating the necessity of such representation. The Company shall not be required to deliver any Shares under the Plan prior to (i) the admission of such Shares to listing on any stock exchange on which Shares may then be listed, or (ii) the completion of such registration or other qualification under any state or federal law, rule or regulation as the Committee shall determine to be necessary or advisable. Section 4.8 Additional Restrictions on Incentive Stock Options. In addition to the limitations of section 4.7, an Option designated by the Committee to be an Incentive Stock Option shall be subject to the following limitations: (a) If, for any calendar year, the sum of (i) plus (ii) exceeds $100,000, where (i) equals the Fair Market Value (determined as of the date of the grant) of Shares subject to an Option intended to be an Incentive Stock Option which first become available for purchase during such calendar year, and (ii) equals the Fair Market Value (determined as of the date of grant) of Shares subject to any other options intended to be Incentive Stock Options and previously granted to the same Eligible Individual which first become exercisable in such calendar year, then that portion of the Shares granted pursuant to such options which cause the sum of (i) and (ii) to exceed $100,000 shall be deemed to be Shares granted pursuant to a Non-Qualified Stock Option or Non-Qualified Stock Options, with the same terms as the Option or Options intended to be an Incentive Stock Option; (b) Except with the prior written approval of the Committee, no individual shall dispose of Shares acquired pursuant to the exercise of an Incentive Stock Option until after the later of (i) the second anniversary of the date on which the Incentive Stock Option was granted, or (ii) the first anniversary of the date on which the Shares were acquired. Section 4.9 Change in Control Cash Out. (a) Each Option granted under this Plan shall be accompanied by a Limited Stock Appreciation Right that is exercisable at the times and upon the terms and conditions set forth herein. Each Limited Stock Appreciation Right granted hereunder shall be exercisable for a period commencing on the date on which a Change in Control of the Company occurs and ending six (6) months after such date or, if later in the case of any Person, thirty (30) days after the earliest date on which such Person may exercise the Limited Stock Appreciation Right without subjecting himself to liability under section 16 of the Securities Exchange Act of 1934, as amended. A Person in possession of a Limited Stock Appreciation Right granted 9 hereunder may exercise such Limited Stock Appreciation Right by: (i) giving written notice to the Committee, in such form and manner as the Committee may prescribe, of his intent to exercise the Limited Stock Appreciation Right; and (ii) agreeing in such written notice to the cancellation of Options then outstanding to him for a number of Shares equal to the number of Shares for which the Limited Stock Appreciation Right is being exercised. Except as provided in section 4.9(c), within ten (10) days after giving of such a notice, the Committee shall cause the Company to deliver to such person in the discretion of the Committee either (i) a monetary payment in an amount per Share equal to the amount by which the Change of Control Consideration exceeds the Exercise Price per Share of each of the Options being canceled or (ii) Shares or other property with a fair market value at least equal to the monetary payment provided for in subparagraph (i) above. (b) For purposes of section 4.9(a), the term Change in Control Consideration shall mean the greater of (i) the highest price per Share paid by any Person who initiated or sought to effect the Change in Control for a Share during the period of one (1) year ending on the date of the relevant Change in Control of the Company; and (ii) the average Fair Market Value of a Share over the last ten (10) trading days preceding the date of exercise of the Limited Stock Appreciation Right. (c) Notwithstanding anything herein contained to the contrary, the Limited Stock Appreciation Rights granted hereunder shall be canceled immediately prior to the effective time of a Change in Control of the Company resulting from a transaction between the Company and another party pursuant to a written agreement whereby the consummation of the transaction is conditioned upon the availability of "pooling of interests" accounting treatment (within the meaning of A.P.B. No. 16 or any successor thereto); provided, however, that the cancellation of such Limited Stock Appreciation Rights shall be subject to the following conditions: (i) the existence of the Limited Stock Appreciation Rights would (in the opinion of the firm of independent certified public accountants regularly engaged to audit the Company's financial statements) render the transaction ineligible for pooling of interests accounting treatment; (ii) the cancellation of the Limited Stock Appreciation Rights would (in the opinion of the firm of independent certified public accountants regularly engaged to audit the Company's financial statements) render the transaction eligible for pooling of interests accounting treatment; (iii) the transaction is, in fact, consummated; and (iv) the written agreement providing for the transaction provides for each Person to whom a Limited Stock Appreciation Right has been granted to receive, upon the effective date of such transaction, property with a fair market value at least equal to the monetary payment that would be made upon exercise of the Limited Stock Appreciation Right. 10 ARTICLE V AMENDMENT AND TERMINATION Section 5.1 Termination. The Board may suspend or terminate the Plan in whole or in part at any time prior to the tenth anniversary of the Effective Date by giving written notice of such suspension or termination to the Committee. Unless sooner terminated, the Plan shall terminate automatically on the day preceding the tenth anniversary of the Effective Date. In the event of any suspension or termination of the Plan, all Options theretofore granted under the Plan that are outstanding on the date of such suspension or termination of the Plan shall remain outstanding under the terms of the Option agreements granting such Options. Section 5.2 Amendment. The Board may amend or revise the Plan in whole or in part at any time; provided, however, that if the amendment or revision: (a) materially increases the benefits accruing under the Plan; (b) materially increases the number of Shares which may be issued under the Plan; or (c) materially modifies the requirements as to eligibility for Options under the Plan; such amendment or revision shall be subject to approval by the shareholders of the Company. Section 5.3 Adjustments in the Event of a Business Reorganization. (a) In the event of any merger, consolidation, or other business reorganization in which the Company is the surviving entity, and in the event of any stock split, stock dividend or other event generally affecting the number of Shares held by each Person who is then a holder of record of Shares, the number of Shares covered by each outstanding Option and the number of Shares available pursuant to section 4.2 shall be adjusted to account for such event. Such adjustment shall be effected by multiplying such number of Shares by an amount equal to the number of Shares that would be owned after such event by a Person who, immediately prior to such event, was the holder of record of one Share, and the Exercise Price of the Options shall be adjusted by dividing the Exercise Price by such number of Shares; provided, however, that the Committee may, in its discretion, establish another appropriate method of adjustment. (b) In the event of any merger, consolidation, or other business reorganization in which the Company is not the surviving entity: (i) any Options granted under the Plan which remain outstanding may be canceled as of the effective date of such merger, consolidation, business reorganization, liquidation or sale by the Board upon 30 days' written notice to each Option holder in advance of the effective date of such event; and (ii) any Option which is not canceled pursuant to section 5.3(b)(i) shall be adjusted in such manner as the Committee shall deem appropriate to account for such merger, consolidation or other business reorganization. 11 ARTICLE VI MISCELLANEOUS Section 6.1 Status as an Employee Benefit Plan. This Plan is not intended to satisfy the requirements for qualification under section 401(a) of the Code or to satisfy the definitional requirements for an "employee benefit plan" under section 3(3) of the Employee Retirement Income Security Act of 1974, as amended. It is intended to be a non-qualified incentive compensation program that is exempt from the regulatory requirements of the Employee Retirement Income Security Act of 1974, as amended. The Plan shall be construed and administered so as to effectuate this intent. Section 6.2 No Right to Continued Employment. Neither the establishment of the Plan nor any provisions of the Plan nor any action of the Board or the Committee with respect to the Plan shall be held or construed to confer upon any Eligible Individual any right to a continuation of employment by the Company. The Company reserves the right to dismiss any Eligible Individual or otherwise deal with any Eligible Individual to the same extent as though the Plan had not been adopted. Section 6.3 Construction of Language. Whenever appropriate in the Plan, words used in the singular may be read in the plural, words used in the plural may be read in the singular, and words importing the masculine gender may be read as referring equally to the feminine or the neuter. Any reference to an Article or section number shall refer to an Article or section of this Plan unless otherwise indicated. Section 6.4 Governing Law. The Plan shall be construed, administered and enforced according to the laws of the State of New York without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by federal law. Section 6.5 Headings. The headings of Articles and sections are included solely for convenience of reference. If there is any conflict between such headings and the text of the Plan, the text shall control. Section 6.6 Non-Alienation of Benefits. The right to receive a benefit under the Plan shall not be subject in any manner to anticipation, alienation or assignment, nor shall such right be liable for or subject to debts, contracts, liabilities, engagements or torts, except as required pursuant to a Qualified Domestic Relations Order or as otherwise permitted pursuant to section 4.7(a). Section 6.7 Taxes. The Company shall have the right to deduct from all amounts paid by the Company in cash with respect to an Option under the Plan any taxes required by law to be withheld with respect to such Option. Where any Person is entitled to receive Shares pursuant to the exercise of an Option, the Company shall have the right to require such Person to pay the Company the amount of any tax which the Company is required to withhold with respect to such Shares, or, in lieu thereof, to retain, or to sell without notice, a sufficient number of Shares to cover the amount required to be withheld. 12 Section 6.8 Approval of Shareholders. The Plan and all Options and Limited Stock Appreciation Rights granted hereunder shall be conditioned on the approval of the Plan by the shareholders of Astoria Financial Corporation. No Option or Limited Stock Appreciation Rights granted under the Plan shall be effective, nor shall any such Option or Limited Stock Appreciation Rights be exercised or any Shares issued or purchased, prior to such approval. Section 6.9 Notices. Any communication required or permitted to be given under the Plan, including any notice, direction, designation, comment, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below, or at such other address as one such party may by written notice specify to the other party: (a) If to the Committee: Astoria Financial Company One Astoria Federal Plaza Lake Success, New York 11042-1085 Attention: Corporate Secretary (b) If to an Option holder, to the Option holder's address as shown in the Company's personnel records. 13 EX-10 3 ex10-13.txt EXHIBIT 10.13 Exhibit 10.13 1996 Stock Option Plan for Outside Directors of Astoria Financial Corporation (As amended December 17, 1997) (As amended December 29, 2005) ARTICLE I PURPOSE Section 1.1 General Purpose of the Plan. The purpose of the Plan is to promote the growth and profitability of Astoria Financial Corporation, to provide Eligible Directors of Astoria Financial Corporation and affiliates with an incentive to achieve corporate objectives, to attract and retain key directors of outstanding competence and to provide such Eligible Directors with an equity interest in Astoria Financial Corporation. ARTICLE II DEFINITIONS The following definitions shall apply for the purposes of this Plan, unless a different meaning is plainly indicated by the context: Section 2.1 Association means Astoria Federal Savings and Loan Association, a federally chartered savings institution, and any successor thereto. Section 2.2 Board means the board of directors of Astoria Financial Corporation. Section 2.3 Change in Control of the Company means any of the following events: (a) approval by the stockholders of Astoria Financial Corporation of a transaction that would result in the reorganization, merger or consolidation of Astoria Financial Corporation with one or more other persons, other than a transaction following which: (i) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in Astoria Financial Corporation; and (ii) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) 1 in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of Astoria Financial Corporation; (b) the acquisition of all or substantially all of the assets of Astoria Financial Corporation or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the outstanding securities of Astoria Financial Corporation entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the stockholders of Astoria Financial Corporation of any transaction which would result in such an acquisition; (c) a complete liquidation or dissolution of Astoria Financial Corporation, or approval by the stockholders of Astoria Financial Corporation of a plan for such liquidation or dissolution; (d) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board of Directors of Astoria Financial Corporation do not belong to any of the following groups: (i) individuals who were members of the Board of Directors of Astoria Financial Corporation on the date of this Agreement; or (ii) individuals who first became members of the Board of Directors of Astoria Financial Corporation after the date of this Agreement either: (A) upon election to serve as a member of the Board of Directors of Astoria Financial Corporation by affirmative vote of three-quarters of the members of such Board, or of a nominating committee thereof, in office at the time of such first election; or (B) upon election by the stockholders of Astoria Financial Corporation to serve as a member of the Board of Directors of Astoria Financial Corporation, but only if nominated for election by affirmative vote of three-quarters of the members of the Board of Directors of Astoria Financial Corporation, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of Directors of Astoria Financial Corporation; or (e) any event which would be described in section 2.3(a), (b), (c) or (d) if 2 the term "Association" were substituted for the term "Astoria Financial Corporation" therein. In no event, however, shall a Change in Control be deemed to have occurred as a result of any acquisition of securities or assets of Astoria Financial Corporation, the Association, or a subsidiary of either of them, by Astoria Financial Corporation, the Association, or a subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this section 2.4, the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. Section 2.4 Code means the Internal Revenue Code of 1986 (including the corresponding provisions of any succeeding law). Section 2.5 Committee means the Committee described in section 3.1. Section 2.6 Company means Astoria Financial Corporation, a corporation organized and existing under the laws of the State of Delaware, and any successor thereto, the Association and any successor thereto and, with the prior approval of the Board, and subject to such terms and conditions as may be imposed by the Board, any other savings bank, savings and loan association, bank, corporation, financial institution or other business organization or institution. Section 2.7 Disability means a condition of total incapacity, mental or physical, for further performance of duty with the Company which the Committee shall have determined, on the basis of competent medical evidence, is likely to be permanent. Section 2.8 Effective Date means the date on which the Plan is approved by the holders of a majority of the Shares represented in person or by proxy at a meeting duly called and held. Section 2.9 Eligible Director means a member of the Board who is not also an employee or an officer of the Company. Section 2.10 Exchange Act means the Securities Exchange Act of 1934. Section 2.11 Exercise Price means the price per Share at which Shares subject to an Option may be purchased upon exercise of the Option, determined in accordance with section 4.3. Section 2.12 Fair Market Value means, with respect to a Share on a specified date: (a) the final quoted sales price on the date in question (or if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) as reported in the principal consolidated reporting system with respect to securities listed or admitted to trading on the principal United States securities exchange on which the Shares are listed or admitted to trading; or (b) if the Shares are not listed or admitted to trading on any such exchange, the closing bid quotation with respect to a Share on such date on the National Association of Securities Dealers Automated Quotations System, or, if no such quotation is provided, on another similar system, selected by the Committee, then in use; or 3 (c) if sections 2.12(a) and (b) are not applicable, the fair market value of a Share as the Committee may determine. Section 2.13 Limited Stock Appreciation Right means a right granted pursuant to section 4.7. Section 2.14 Option means a right to purchase Shares that is granted pursuant to section 4.1. Section 2.15 Option Period means the period during which an Option may be exercised, determined in accordance with section 4.4. Section 2.16 Person means an individual, a corporation, a bank, a savings bank, a savings and loan association, a financial institution, a partnership, an association, a joint-stock company, a trust, an estate, an unincorporated organization and any other business organization or institution. Section 2.17 Plan means the 1996 Stock Option Plan for Outside Directors of Astoria Financial Corporation, as amended from time to time. Section 2.18 Qualified Domestic Relations Order means a Domestic Relations Order that: (a) clearly specifies (i) the name and last known mailing address of the Option holder and of each person given rights under such Domestic Relations Order, (ii) the amount or percentages of the Option holder's benefits under this Plan to be paid to each person covered by such Domestic Relations Order, (iii) the number of payments or the period to which such Domestic Relations Order applies, and (iv) the name of this Plan; and (b) does not require the payment of a benefit in a form or amount that is (i) not otherwise provided for under the Plan, or (ii) inconsistent with a previous Qualified Domestic Relations Order. For the purposes of this Plan, a "Domestic Relations Order" means a judgment, decree or order (including the approval of a property settlement) that is made pursuant to a state domestic relations or community property law and relates to the provision of child support, alimony payments, or marital property rights to a spouse, child or other dependent of an Option holder. Section 2.19 Share means a share of Common Stock, par value $.01 per share of Astoria Financial Corporation. ARTICLE III ADMINISTRATION Section 3.1 Committee. The Plan shall be administered by a Committee which shall be the Compensation Committee of Astoria Financial Corporation. Section 3.2 Committee Action. The Committee shall hold such meetings, and may make such administrative rules and regulations, as it may deem proper. A majority of the members of the Committee shall constitute a quorum, and the action of a majority of the members of the Committee present at a meeting at which a quorum is present, as well as actions taken pursuant to the unanimous written consent of all of the members of the Committee without holding a meeting, shall be deemed to be actions of the Committee. 4 All actions of the Committee shall be final and conclusive and shall be binding upon the Company and all other interested parties. Any Person dealing with the Committee shall be fully protected in relying upon any written notice, instruction, direction or other communication signed by the secretary of the Committee and one member of the Committee, by two members of the Committee or by a representative of the Committee authorized to sign the same in its behalf. Section 3.3 Committee Responsibilities. Subject to the terms and conditions of the Plan and such limitations as may be imposed from time to time by the Board, the Committee shall be responsible for the overall management and administration of the Plan and shall have such authority as shall be necessary or appropriate in order to carry out its responsibilities, including, without limitation, the authority: (a) to interpret and construe the Plan, and to determine all questions that may arise under the Plan as to eligibility for participation in the Plan, the number of Shares subject to the Options to be granted, and the terms and conditions thereof; (b) to adopt rules and regulations and to prescribe forms for the operation and administration of the Plan; and (c) to take any other action not inconsistent with the provisions of the Plan that it may deem necessary or appropriate. ARTICLE IV OPTION GRANTS Section 4.1 Available Shares. Subject to section 5.3, the maximum aggregate number of Shares with respect to which Options may be granted at any time shall be equal to the excess of: (a) 60,000 Shares; over (b) the sum of: (i) the number of Shares with respect to which previously granted Options may then or may in the future be exercised; plus (ii) the number of Shares with respect to which previously granted Options have been exercised. For purposes of this section 4.1, an Option shall not be considered as having been exercised to the extent that such Option terminates by reason other than the purchase of the related Shares. Section 4.2 Option Grants. (a) On the Effective Date, each Person who is then an Eligible Director shall be granted an Option to purchase 1,000 Shares. A Person who becomes an Eligible Director subsequent to the Effective Date shall be granted, on the 15th day of the month following the month in which such individual becomes an Eligible Director (or, if such date is not a business day, the first business day 5 thereafter), an Option to purchase 2,000 Shares. No Eligible Director shall be granted more than one Option pursuant to this section 4.2(a). (b) Subject to sections 4.2(c) and 4.1, on January 15, 1997 and on January 15 of each calendar year during which the Plan is in effect (or, if such date is not a business day, the first business day thereafter), each Person who is an Eligible Director on such date shall be granted an Option to purchase 1,000 Shares. (c) Notwithstanding sections 4.2(a) and (b), in the event that, as of the first business day of any calendar month, the number of available Shares determined under section 4.1 is less than the total number of Shares with respect to which Options would be granted under sections 4.2(a) and (b) during such month, each Eligible Director scheduled to receive a grant of Options during such month shall be granted an Option for the number of whole Shares determined by multiplying (i) the number of Shares with respect to which the Eligible Director would have been granted an Option on such date by (ii) a fraction, the numerator of which is the number of Shares that are then available under section 4.1 and the denominator of which is the total number of Shares that would have to have been available under section 4.1 in order to grant all of the Options that would otherwise have been granted under sections 4.2(a) and (b) during such month, and rounding to the nearest whole Share; provided, however, that if rounding will require more Shares to be available than provided in section 4.1, then the amount determined pursuant to this section 4.2(c) will be calculated by rounding down to the lesser whole number. (d) Any Option granted under this section 4.2 shall be evidenced by a written agreement which shall specify the number of Shares covered by the Option, the Exercise Price for the Shares subject to the Option, the Option Period, all as determined pursuant to this Article IV. The Option agreement shall also set forth specifically or incorporate by reference the applicable provisions of the Plan. Section 4.3 Exercise Price. The price per Share at which an Option granted to an Eligible Director under section 4.2 may be exercised shall be the Fair Market Value of a Share on the date on which the Option is granted. Section 4.4 Option Period. The Option Period during which an Option granted to an Eligible Director under section 4.2 may be exercised shall commence on the date the Option is granted and shall expire on the earlier of: (i) the last day of the one-year period commencing on the date the Eligible Director ceases to be a director of the Company for any reason other than removal for cause in accordance with the Company's bylaws; (ii) removal for cause in accordance with the Company's bylaws; or (iii) the last day of the ten-year period commencing on the date on which the Option was granted. 6 Section 4.5 Method of Exercise. (a) Subject to the limitations of the Plan and the Option agreement, an Option holder may, at any time during the Option Period, exercise his right to purchase all or any part of the Shares to which the Option relates; provided, however, that the minimum number of Shares which may be purchased at any time shall be 100, or, if less, the total number of Shares relating to the Option which remain unpurchased. An Option holder shall exercise an Option to purchase Shares by: (i) giving written notice to the Committee, in such form and manner as the Committee may prescribe, of his intent to exercise the Option; (ii) delivering to the Committee full payment, consistent with section 4.5(b), for the Shares as to which the Option is to be exercised; and (iii) satisfying such other conditions as may be prescribed in the Option agreement. (b) The Exercise Price of Shares to be purchased upon exercise of any Option shall be paid in full in cash (by certified or bank check or such other instrument as the Company may accept) or by one or more of the following: (i) in the form of Shares already owned beneficially for a period of more than six months by the Option holder having an aggregate Fair Market Value on the date the Option is exercised equal to the aggregate Exercise Price to be paid; (ii) after a period of six months from the date of grant of any such Option, by requesting the Company to cancel without payment Options outstanding to such Person for that number of Shares whose aggregate Fair Market Value on the date of exercise, when reduced by their aggregate Exercise Price, equals the aggregate Exercise Price of the Options being exercised; or (iii) by a combination thereof. Payment for any Shares to be purchased upon exercise of an Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. (c) When the requirements of section 4.5(a) and (b) have been satisfied, the Committee shall take such action as is necessary to cause the issuance of a stock certificate evidencing the Option holder's ownership of such Shares. The Person exercising the Option shall have no right to vote or to receive dividends, nor have any other rights with respect to the Shares, prior to the date as of which such Shares are transferred to such Person on the stock transfer records of the Company, and no adjustments shall be made for any dividends or other rights for which the record date is prior to the date as of which such transfer is effected, except as may be required under section 5.3. Section 4.6 Limitations on Options. (a) An Option by its terms shall not be transferable by the Option holder other than by will or the laws of descent and distribution, or pursuant to the terms of a Qualified Domestic Relations Order, and shall be exercisable, during the life of the Option holder, only by the Option holder or an alternate payee designated pursuant to such a Qualified Domestic Relations Order; provided, however, that an Eligible Director may, at any time at or after the grant of an Option under the Plan, apply to the Committee for approval to transfer all or any portion of such Option which is then unexercised to such Eligible Director's spouse, and the lineal ascendents and lineal descendants of such Eligible Director or his spouse, or any one or more of them, or to an entity wholly owned by (including but not limited to a 7 trust the exclusive beneficiaries of which are) one or more of them or wholly owned jointly by one or more of them and the Eligible Director. The Committee may approve or withhold approval of such transfer in its sole and absolute discretion. If such transfer is approved, it shall be effected by written notice to the Company given in such form and manner as the Committee may prescribe and actually received by the Company prior to the death of the person giving it. Thereafter, the transferee shall have with respect to such Option, all of the rights, privileges and obligations which would attach thereunder to the transferor. If a privilege of the Option depends on the life, employment or other status of the transferor, such privilege of the Option for the transferee shall continue to depend upon the life, employment or other status of the transferor. The Committee shall have full and exclusive authority to interpret and apply the provisions of the Plan to transferees to the extent not specifically addressed herein. (b) The Company's obligation to deliver Shares with respect to an Option shall, if the Company so requests, be conditioned upon the receipt of a representation as to the investment intention of the Person to whom such Shares are to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply with the provisions of applicable federal, state or local law. It may be provided that any such representation shall become inoperative upon a registration of the Shares or upon the occurrence of any other event eliminating the necessity of such representation. The Company shall not be required to deliver any Shares under the Plan prior to (i) the admission of such Shares to listing on any stock exchange on which Shares may then be listed, or (ii) the completion of such registration or other qualification under any state or federal law, rule or regulation as the Company shall determine to be necessary or advisable. Section 4.7 Change in Control Cash Out. (a) Each Option granted under this Plan shall be accompanied by a Limited Stock Appreciation Right that is exercisable at the times and upon the terms and conditions set forth herein. Each Limited Stock Appreciation Right granted hereunder shall be exercisable for a period commencing on the date on which a Change in Control of the Company occurs and ending six (6) months after such date or, if later in the case of any Person, thirty (30) days after the earliest date on which such Person may exercise the Limited Stock Appreciation Right without subjecting himself to liability under section 16 of the Securities Exchange Act of 1934, as amended. A Person in possession of a Limited Stock Appreciation Right granted hereunder may exercise such Limited Stock Appreciation Right by: (i) giving written notice to the Committee, in such form and manner as the Committee may prescribe, of his intent to exercise the Limited Stock Appreciation Right; and (ii) agreeing in such written notice to the cancellation of Options then outstanding to him for a number of Shares equal to the number of Shares for which the Limited Stock Appreciation Right is being exercised. Except as provided in section 4.7(c), within ten (10) days after giving of such a notice, the Committee shall cause the Company to deliver to such person in the discretion of the Committee either (i) a monetary payment in an amount per Share equal to the amount by which the Change of Control Consideration exceeds the Exercise Price per Share of each of the Options being canceled or (ii) Shares or other property with a fair market value at least equal to the monetary payment provided for in subparagraph (i) above. 8 (b) For purposes of section 4.7(a), the term Change in Control Consideration shall mean the greater of (i) the highest price per Share paid by any Person who initiated or sought to effect the Change in Control for a Share during the period of one (1) year ending on the date of the relevant Change in Control of the Company; and (ii) the average Fair Market Value of a Share over the last ten (10) trading days preceding the date of exercise of the Limited Stock Appreciation Right. (c) Notwithstanding anything herein contained to the contrary, the Limited Stock Appreciation Rights granted hereunder shall be canceled immediately prior to the effective time of a Change in Control of the Company resulting from a transaction between the Company and another party pursuant to a written agreement whereby the consummation of the transaction is conditioned upon the availability of "pooling of interests" accounting treatment (within the meaning of A.P.B. No. 16 or any successor thereto); provided, however, that the cancellation of such Limited Stock Appreciation Rights shall be subject to the following conditions: (i) the existence of the Limited Stock Appreciation Rights would (in the opinion of the firm of independent certified public accountants regularly engaged to audit the Company's financial statements) render the transaction ineligible for pooling of interests accounting treatment; (ii) the cancellation of the Limited Stock Appreciation Rights would (in the opinion of the firm of independent certified public accountants regularly engaged to audit the Company's financial statements) render the transaction eligible for pooling of interests accounting treatment; (iii) the transaction is, in fact, consummated; and (iv) the written agreement providing for the transaction provides for each Person to whom a Limited Stock Appreciation Right has been granted to receive, upon the effective date of such transaction, property other than cash with a fair market value at least equal to the monetary payment that would be made upon exercise of the Limited Stock Appreciation Right. ARTICLE V AMENDMENT AND TERMINATION Section 5.1 Termination. The Board may suspend or terminate the Plan in whole or in part at any time prior to the tenth anniversary of the Effective Date by giving written notice of such suspension or termination to the Committee. Unless sooner terminated, the Plan shall terminate automatically on the day preceding the tenth anniversary of the Effective Date. In the event of any suspension or termination of the Plan, all Options theretofore granted under the Plan that are outstanding on the date of such suspension or termination of the Plan shall remain outstanding under the terms of the Option agreements evidencing such Options. Section 5.2 Amendment. The Board may amend or revise the Plan in whole or in part at any time; provided, however, that if the amendment or revision: 9 (a) materially increases the benefits accruing under the Plan; (b) materially increases the number of Shares which may be issued under the Plan; or (c) materially modifies the requirements as to eligibility for Options under the Plan; such amendment or revision shall be subject to approval by the shareholders of the Company. Section 5.3 Adjustments in the Event of a Business Reorganization. (a) In the event of any merger, consolidation, or other business reorganization in which the Company is the surviving entity, and in the event of any stock split, stock dividend or other event generally affecting the number of Shares held by each Person who is then a holder of record of Shares, the number of Shares covered by each outstanding Option and the number of Shares available pursuant to section 4.1 shall be adjusted to account for such event. Such adjustment shall be effected by multiplying such number of Shares by an amount equal to the number of Shares that would be owned after such event by a Person who, immediately prior to such event, was the holder of record of one Share, and the Exercise Price of the Options shall be adjusted by dividing the Exercise Price by such number of Shares; provided, however, that the Committee may, in its discretion, establish another appropriate method of adjustment. (b) In the event of any merger, consolidation, or other business reorganization in which the Company is not the surviving entity: (i) any Options granted under the Plan which remain outstanding may be canceled as of the effective date of such merger, consolidation, business reorganization, liquidation or sale by the Board upon 30 days' written notice to each Option holder in advance of the effective date of such event; and (ii) any Option which is not canceled pursuant to section 5.3(b)(i) shall be adjusted in such manner as the Committee shall deem appropriate to account for such merger, consolidation or other business reorganization. ARTICLE VI MISCELLANEOUS Section 6.1 Status as an Employee Benefit Plan. This Plan is not intended to satisfy the requirements for qualification under section 401(a) of the Code or to satisfy the definitional requirements for an "employee benefit plan" under section 3(3) of the Employee Retirement Income Security Act of 1974, as amended. It is intended to be a non-qualified incentive compensation program for self-employed individuals that is exempt from the regulatory requirements of the Employee Retirement Income Security Act of 1974, as amended. The Plan shall be construed and administered so as to effectuate this intent. 10 Section 6.2 No Right to Continued Employment. Neither the establishment of the Plan nor any provisions of the Plan nor any action of the Board or the Committee with respect to the Plan shall be held or construed to confer upon any Eligible Director any right to a continuation of his position as a director of the Company. The Company reserves the right to remove any Eligible Director or otherwise deal with any Eligible Director to the same extent as though the Plan had not been adopted. Section 6.3 Construction of Language. Whenever appropriate in the Plan, words used in the singular may be read in the plural, words used in the plural may be read in the singular, and words importing the masculine gender may be read as referring equally to the feminine or the neuter. Any reference to an Article or section number shall refer to an Article or section of this Plan unless otherwise indicated. Section 6.4 Governing Law. The Plan shall be construed, administered and enforced according to the laws of the State of New York without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by federal law. Section 6.5 Headings. The headings of Articles and sections are included solely for convenience of reference. If there is any conflict between such headings and the text of the Plan, the text shall control. Section 6.6 Non-Alienation of Benefits. The right to receive a benefit under the Plan shall not be subject in any manner to anticipation, alienation or assignment, nor shall such right be liable for or subject to debts, contracts, liabilities, engagements or torts, except as required by a Qualified Domestic Relations Order or as otherwise permitted pursuant to section 4.6(a). Section 6.7 Taxes. The Company shall have the right to deduct from all amounts paid by the Company in cash with respect to an Option under the Plan any taxes required by law to be withheld with respect to such Option. Where any Person is entitled to receive Shares pursuant to the exercise of an Option, the Company shall have the right to require such Person to pay the Company the amount of any tax which the Company is required to withhold with respect to such Shares, or, in lieu thereof, to retain, or to sell without notice, a sufficient number of Shares to cover the amount required to be withheld. Section 6.8 Approval of Shareholders. The Plan and all Options and Limited Stock Appreciation Rights granted hereunder shall be conditioned on the approval of the Plan by the shareholders of Astoria Financial Corporation. No Option or Limited Stock Appreciation Right granted under the Plan shall be effective, nor shall any such Option or Limited Stock Appreciation Right be exercised or any Shares issued or purchased, prior to such approval. Section 6.9 Notices. Any communication required or permitted to be given under the Plan, including any notice, direction, designation, comment, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally or five (5) days after mailing if 11 mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below, or at such other address as one such party may by written notice specify to the other party: (a) If to the Compensation Committee: Astoria Financial Company One Astoria Federal Plaza Lake Success, New York 11042-1085 Attention: Corporate Secretary (b) If to an Option holder, to the Option holder's address as shown in the Company's records. 12 EX-10 4 ex10-14.txt EXHIBIT 10.14 Exhibit 10.14 1999 Stock Option Plan for Officers and Employees of Astoria Financial Corporation (As amended December 29, 2005) ARTICLE I PURPOSE Section 1.1 General Purpose of the Plan. The purpose of the Plan is to promote the growth and profitability of Astoria Financial Corporation, to provide certain key officers and employees of Astoria Financial Corporation and affiliates with an incentive to achieve corporate objectives, to attract and retain key individuals of outstanding competence and to provide such individuals with an equity interest in Astoria Financial Corporation. ARTICLE II DEFINITIONS The following definitions shall apply for the purposes of this Plan, unless a different meaning is plainly indicated by the context: Section 2.1 Association means Astoria Federal Savings and Loan Association, a federally chartered savings institution, and any successor thereto. Section 2.2 Board means the board of directors of Astoria Financial Corporation. Section 2.3 Change in Control of the Company means any of the following events: (a) approval by the stockholders of Astoria Financial Corporation of a transaction that would result in the reorganization, merger or consolidation of Astoria Financial Corporation with one or more other persons, other than a transaction following which: (i) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in Astoria Financial Corporation; and (ii) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of Astoria Financial Corporation; (b) the acquisition of all or substantially all of the assets of Astoria Financial Corporation or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the outstanding securities of Astoria Financial Corporation entitled 1 to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the stockholders of Astoria Financial Corporation of any transaction which would result in such an acquisition; (c) a complete liquidation or dissolution of Astoria Financial Corporation, or approval by the stockholders of Astoria Financial Corporation of a plan for such liquidation or dissolution; (d) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board of Directors of Astoria Financial Corporation do not belong to any of the following groups: (i) individuals who were members of the Board of Directors of Astoria Financial Corporation on the date of this Agreement; or (ii) individuals who first became members of the Board of Directors of Astoria Financial Corporation after the date of this Agreement either: (A) upon election to serve as a member of the Board of Directors of Astoria Financial Corporation by affirmative vote of three-quarters of the members of such Board, or of a nominating committee thereof, in office at the time of such first election; or (B) upon election by the stockholders of Astoria Financial Corporation to serve as a member of the Board of Astoria Financial Corporation, but only if nominated for election by affirmative vote of three-quarters of the members of the Board of Directors of Astoria Financial Corporation, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of Astoria Financial Corporation; or (e) any event which would be described in section 2.3(a), (b), (c) or (d) if the term "Association" were substituted for the term "Company" therein. In no event, however, shall a Change in Control be deemed to have occurred as a result of any acquisition of securities or assets of Astoria Financial Corporation, the Association, or a subsidiary of either of them, by Astoria Financial Corporation, the Association, or a subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this section 2.3, the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. Section 2.4 Code means the Internal Revenue Code of 1986 (including the corresponding provisions of any succeeding law). Section 2.5 Committee means the Committee described in section 3.1. Section 2.6 Company means Astoria Financial Corporation, a corporation organized and existing under the laws of the State of Delaware, and any successor thereto, the Association and any successor thereto and, with the prior approval of the Board, and subject to such terms and conditions as may be imposed by the Board, any other savings bank, savings and loan association, bank, corporation, financial institution or other business organization or institution. 2 Section 2.7 Disability means a condition of total incapacity, mental or physical, for further performance of duty with the Company which the Committee shall have determined, on the basis of competent medical evidence, is likely to be permanent. Section 2.8 Disinterested Board Member means a member of the Board who (a) is not a current employee of the Company, (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year, (c) has not been an officer of the Company, (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director and (e) is not currently and for a period of at least one year has not been eligible for discretionary awards under any stock compensation plan of the Company. The term Disinterested Board Member shall be interpreted in such manner as shall be necessary to conform to the requirements of section 162(m) of the Code and Rule 16b-3 promulgated under the Exchange Act. Section 2.9 Effective Date means the date on which the Plan is approved by the holders of a majority of the Shares represented in person or by proxy at a meeting duly called and held. Section 2.10 Eligible Individual means any individual whom the Committee may determine to be a key officer or employee of the Company and select to receive a grant of an Option pursuant to the Plan. Section 2.11 Exchange Act means the Securities Exchange Act of 1934. Section 2.12 Exercise Price means the price per Share at which Shares subject to an Option may be purchased upon exercise of the Option, determined in accordance with section 4.4. Section 2.13 Fair Market Value means, with respect to a Share on a specified date: (a) the final quoted sales price on the date in question (or if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) as reported in the principal consolidated reporting system with respect to securities listed or admitted to trading on the principal United States securities exchange on which the Shares are listed or admitted to trading; or (b) if the Shares are not listed or admitted to trading on any such exchange, the closing bid quotation with respect to a Share on such date on the National Association of Securities Dealers Automated Quotations System, or, if no such quotation is provided, on another similar system, selected by the Committee, then in use; or (c) if sections 2.13(a) and (b) are not applicable, the fair market value of a Share as the Committee may determine. Section 2.14 Incentive Stock Option means a right to purchase Shares that is granted pursuant to section 4.1, that is designated by the Committee to be an Incentive Stock Option and that is intended to satisfy the requirements of section 422A of the Code. Section 2.15 Limited Stock Appreciation Right means a right granted pursuant to section 4.9. Section 2.16 Non-Qualified Stock Option means a right to purchase Shares that is granted pursuant to section 4.1, that is designated by the Committee to be a Non-Qualified Stock Option and that is not intended to satisfy the requirements of section 422A of the Code. Section 2.17 Option means either an Incentive Stock Option or a Non-Qualified Stock Option. Section 2.18 Option Period means the period during which an Option may be exercised, determined in accordance with section 4.5. 3 Section 2.19 Person means an individual, a corporation, a bank, a savings bank, a savings and loan association, a financial institution, a partnership, an association, a joint-stock company, a trust, an estate, an unincorporated organization and any other business organization or institution. Section 2.20 Plan means the 1999 Stock Option Plan for Officers and Employees of Astoria Financial Corporation, as amended from time to time. Section 2.21 Qualified Domestic Relations Order means a Domestic Relations Order that: (a) clearly specifies (i) the name and last known mailing address of the Option holder and of each person given rights under such Domestic Relations Order, (ii) the amount or percentages of the Option holder's benefits under this Plan to be paid to each person covered by such Domestic Relations Order, (iii) the number of payments or the period to which such Domestic Relations Order applies, and (iv) the name of this Plan; and (b) does not require the payment of a benefit in a form or amount that is (i) not otherwise provided for under the Plan, or (ii) inconsistent with a previous Qualified Domestic Relations Order. For the purposes of this Plan, a "Domestic Relations Order" means a judgment, decree or order (including the approval of a property settlement) that is made pursuant to a state domestic relations or community property law and relates to the provision of child support, alimony payments, or marital property rights to a spouse, child or other dependent of an Option holder. Section 2.22 Retirement means retirement at the normal or early retirement date as set forth in any tax-qualified retirement/pension plan of the Association. Section 2.23 Share means a share of Common Stock, par value $.01 per share, of Astoria Financial Corporation. Section 2.24 Termination for Cause means the termination upon an intentional failure to perform stated duties, breach of a fiduciary duty involving personal dishonesty, which results in material loss to the Company or one of its affiliates or willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final case-and-desist order which results in material loss to the Company or one of its affiliates. Section 2.25 Threatened Change in Control means (a) the circulation of a proxy statement by any Person other than management of Astoria Financial Corporation seeking stockholder approval of a transaction that would result in a Change in Control of the Company or (b) the commencement of a tender offer (within the meaning of section 14 of the Exchange Act) which, if consummated, would result in a Change in Control of the Company. ARTICLE III ADMINISTRATION Section 3.1 Committee. The Plan shall be administered by a Committee consisting of the members of the Compensation Committee of Astoria Financial Corporation who are Disinterested Board Members. If fewer than three members of the Compensation Committee are Disinterested Board Members, then the Board shall appoint to the Committee such additional Disinterested Board Members as shall be necessary to provide for a Committee consisting of at least three Disinterested Board Members. Section 3.2 Committee Action. The Committee shall hold such meetings, and may make such administrative rules and regulations, as it may deem proper. A majority of the members of the Committee shall constitute a quorum, and the action of a majority of the members of the Committee present at a meeting at which a quorum is present, as well as actions taken pursuant to the unanimous written consent of all of the members of the Committee without holding a meeting, shall be deemed to be actions of the Committee. All actions of the Committee shall be final and conclusive and shall be binding upon the Company and all other interested parties. Any Person dealing with the Committee shall be fully protected in relying upon any written notice, instruction, direction or other communication signed by the secretary of the Committee and one 4 member of the Committee, by two members of the Committee or by a representative of the Committee authorized to sign the same in its behalf. Section 3.3 Committee Responsibilities. Subject to the terms and conditions of the Plan and such limitations as may be imposed from time to time by the Board, the Committee shall be responsible for the overall management and administration of the Plan and shall have such authority as shall be necessary or appropriate in order to carry out its responsibilities, including, without limitation, the authority: (a) to interpret and construe the Plan, and to determine all questions that may arise under the Plan as to eligibility for participation in the Plan, the number of Shares subject to the Options, if any, to be granted, and the terms and conditions thereof; (b) to adopt rules and regulations and to prescribe forms for the operation and administration of the Plan; and (c) to take any other action not inconsistent with the provisions of the Plan that it may deem necessary or appropriate. ARTICLE IV STOCK OPTIONS Section 4.1 In General. Subject to the limitations of the Plan, the Committee may, in its discretion, grant to an Eligible Individual an Option to purchase Shares. Any such Option shall be evidenced by a written agreement which shall: (a) designate the Option as either an Incentive Stock Option or a Non-Qualified Stock Option; (b) specify the number of Shares covered by the Option; (c) specify the Exercise Price, determined in accordance with section 4.4, for the Shares subject to the Option; (d) specify the Option Period determined in accordance with section 4.5; (e) set forth specifically or incorporate by reference the applicable provisions of the Plan; and (f) contain such other terms and conditions not inconsistent with the Plan as the Committee may, in its discretion, prescribe with respect to an Option granted to an Eligible Individual. Section 4.2 Available Shares. Subject to section 5.3, the maximum aggregate number of Shares with respect to which Options may be granted at any time shall be equal to the excess of: (a) 2,500,000 Shares; over (b) the sum of: (i) the number of Shares with respect to which previously granted Options may then or may in the future be exercised; plus 5 (ii) the number of Shares with respect to which previously granted Options have been exercised. For purposes of this section 4.2, an Option shall not be considered as having been exercised to the extent that such Option terminates by reason other than the purchase of the related Shares. Section 4.3 Size of Option. Subject to section 4.2 and such limitations as the Board may from time to time impose, the number of Shares as to which an Eligible Individual may be granted Options shall be determined by the Committee, in its discretion. The maximum number of Shares that may be granted to any one individual under this Plan shall be the entire number of Shares then available under the Plan. Section 4.4 Exercise Price. The price per Share at which an Option granted to an Eligible Individual may be exercised shall be determined by the Committee, in its discretion; provided, however, that the Exercise Price shall not be less than (a) the Fair Market Value of a Share on the date on which the Option is granted and (b) in the case of an Option intended to be an Incentive Stock Option that is granted to an Eligible Individual who, at the time the Option is granted, owns Shares comprising more than 10% of the total combined voting power of all classes of stock of the Company, shall not be less than 110% of the Fair Market Value of a Share. Section 4.5 Option Period. The Option Period during which an Option granted to an Eligible Individual may be exercised shall commence on the date specified by the Committee in the Option agreement and shall expire on the earliest of: (a) the date specified by the Committee in the Option agreement; (b) the last day of the three-month period commencing on the date of the Eligible Individual's termination of employment with the Company, other than on account of death or Disability, Retirement or a Termination for Cause; (c) the last day of the one-year period commencing on the date of the Eligible Individual's termination of employment due to death, Disability or Retirement; (d) as of the time and on the date the Eligible Individual ceases to be an employee of the Company due to a Termination for Cause; (e) the last day of the ten-year period commencing on the date on which the Option was granted; and (f) for an Option intended to be an Incentive Stock Option that is granted to an Eligible Individual who, at the time the Option is granted, owns Shares comprising more than 10% of the total combined voting power of all classes of stock of the Company, the last day of the five-year period commencing on the date on which the Option was granted; provided, however, that in the event of a Threatened Change in Control or a Change in Control of the Company while there is outstanding any Option whose Option Period has not commenced, such Option Period shall automatically commence on the earliest date on which the Threatened Change in Control or Change in Control of the Company is deemed to have occurred. Section 4.6 Method of Exercise. (a) Subject to the limitations of the Plan and the Option agreement, an Option holder may, at any time during the Option Period, exercise his right to purchase all or any part of the Shares to which the Option relates; provided, however, that the minimum number of Shares which may be purchased shall be 100, or, if less, the total number 6 of Shares relating to the Option which remain unpurchased. An Option holder shall exercise an Option to purchase Shares by: (i) giving written notice to the Committee, in such form and manner as the Committee may prescribe, of his intent to exercise the Option; (ii) delivering to the Committee full payment, consistent with section 4.6(b), for the Shares as to which the Option is to be exercised; and (iii) satisfying such other conditions as may be prescribed in the Option agreement. (b) The Exercise Price of Shares to be purchased upon exercise of any Option shall be paid in full in cash (by certified or bank check or such other instrument as the Company may accept) or, if and to the extent permitted by the Committee, by one or more of the following: (i) in the form of Shares already owned beneficially for a period of more than six months by the Option Holder having an aggregate Fair Market Value on the date the Option is exercised equal to the aggregate Exercise Price to be paid; (ii) after a period of six months from the date of grant of any such Option, by requesting the Company to cancel without payment Options outstanding to such Person for that number of Shares whose aggregate Fair Market Value on the date of exercise, when reduced by their aggregate Exercise Price, equals the aggregate Exercise Price of the Options being exercised; or (iii) by a combination thereof. Payment for any Shares to be purchased upon exercise of an Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. (c) When the requirements of section 4.6(a) and (b) have been satisfied, the Committee shall take such action as is necessary to cause the issuance of a stock certificate evidencing the Option holder's ownership of such Shares. The Person exercising the Option shall have no right to vote or to receive dividends, nor have any other rights with respect to the Shares, prior to the date as of which such Shares are transferred to such Person on the stock transfer records of the Company, and no adjustments shall be made for any dividends or other rights for which the record date is prior to the date as of which such transfer is effected, except as may be required under section 5.3. Section 4.7 Limitations on Options. (a) An Option by its terms shall not be transferable by the Option holder other than by will or the laws of descent and distribution, or pursuant to the terms of a Qualified Domestic Relations Order, and shall be exercisable, during the life of the Option holder, only by the Option holder or an alternate payee designated pursuant to such a Qualified Domestic Relations Order; provided, however, that an Eligible Individual may, at any time at or after the grant of a Non-Qualified Stock Option under the Plan, apply to the Committee for approval to transfer all or any portion of such Non-Qualified Stock Option which is then unexercised to such Eligible Individual's spouse, and the lineal ascendents and lineal descendants of such Eligible Individual or his spouse, or any one or more of them, or to an entity wholly owned by (including but not limited to a trust the exclusive beneficiaries of which are) one or more of them or wholly owned jointly by one or more of them and the Eligible Individual. The Committee may approve or withhold approval of such transfer in its sole and absolute discretion. If such transfer is approved, it shall be effected by written notice to the Company given in such form and manner as the Committee may prescribe and actually received by the Company prior to the death of the person giving it. Thereafter, the transferee shall have with respect to such Non-Qualified Stock Option, all of the rights, privileges and obligations which would attach thereunder to the transferor. If a privilege of the Option depends on the life, employment or other status of the transferor, such privilege of the Option for the transferee shall continue to depend upon the life, employment or other status of the transferor. The Committee shall have full and exclusive authority to interpret and apply the provisions of the Plan to transferees to the extent not specifically addressed herein. (b) The Company's obligation to deliver Shares with respect to an Option shall, if the Committee so requests, be conditioned upon the receipt of a representation as to the investment intention of the Option holder to whom such Shares are to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply 7 with the provisions of applicable federal, state or local law. It may be provided that any such representation shall become inoperative upon a registration of the Shares or upon the occurrence of any other event eliminating the necessity of such representation. The Company shall not be required to deliver any Shares under the Plan prior to (i) the admission of such Shares to listing on any stock exchange on which Shares may then be listed, or (ii) the completion of such registration or other qualification under any state or federal law, rule or regulation as the Committee shall determine to be necessary or advisable. Section 4.8 Additional Restrictions on Incentive Stock Options. In addition to the limitations of section 4.7, an Option designated by the Committee to be an Incentive Stock Option shall be subject to the following limitations: (a) If, for any calendar year, the sum of (i) plus (ii) exceeds $100,000, where (i) equals the Fair Market Value (determined as of the date of the grant) of Shares subject to an Option intended to be an Incentive Stock Option which first become available for purchase during such calendar year, and (ii) equals the Fair Market Value (determined as of the date of grant) of Shares subject to any other options intended to be Incentive Stock Options and previously granted to the same Eligible Individual which first become exercisable in such calendar year, then that portion of the Shares granted pursuant to such options which cause the sum of (i) and (ii) to exceed $100,000 shall be deemed to be Shares granted pursuant to a Non-Qualified Stock Option or Non-Qualified Stock Options, with the same terms as the Option or Options intended to be an Incentive Stock Option; (b) Except with the prior written approval of the Committee, no individual shall dispose of Shares acquired pursuant to the exercise of an Incentive Stock Option until after the later of (i) the second anniversary of the date on which the Incentive Stock Option was granted, or (ii) the first anniversary of the date on which the Shares were acquired. Section 4.9 Change in Control Cash Out. (a) Each Option granted under this Plan shall be accompanied by a Limited Stock Appreciation Right that is exercisable at the times and upon the terms and conditions set forth herein. Each Limited Stock Appreciation Right granted hereunder shall be exercisable for a period commencing on the date on which a Change in Control of the Company occurs and ending six (6) months after such date or, if later in the case of any Person, thirty (30) days after the earliest date on which such Person may exercise the Limited Stock Appreciation Right without subjecting himself to liability under section 16 of the Securities Exchange Act of 1934, as amended. A Person in possession of a Limited Stock Appreciation Right granted hereunder may exercise such Limited Stock Appreciation Right by: (i) giving written notice to the Committee, in such form and manner as the Committee may prescribe, of his intent to exercise the Limited Stock Appreciation Right; and (ii) agreeing in such written notice to the cancellation of Options then outstanding to him for a number of Shares equal to the number of Shares for which the Limited Stock Appreciation Right is being exercised. Except as provided in section 4.9(c), within ten (10) days after giving of such a notice, the Committee shall cause the Company to deliver to such person in the discretion of the Committee either (i) a monetary payment in an amount per Share equal to the amount by which the Change of Control Consideration exceeds the Exercise Price per Share of each of the Options being canceled or (ii) Shares or other property with a fair market value at least equal to the monetary payment provided for in subparagraph (i) above. (b) For purposes of section 4.9(a), the term Change in Control Consideration shall mean the greater of (i) the highest price per Share paid by any Person who initiated or sought to effect the Change in Control for a Share during the period of one (1) year ending on the date of the relevant Change in Control of the Company; and (ii) the average Fair Market Value of a Share over the last ten (10) trading days preceding the date of exercise of the Limited Stock Appreciation Right. 8 (c) Notwithstanding anything herein contained to the contrary, the Limited Stock Appreciation Rights granted hereunder shall be canceled immediately prior to the effective time of a Change in Control of the Company resulting from a transaction between the Company and another party pursuant to a written agreement whereby the consummation of the transaction is conditioned upon the availability of "pooling of interests" accounting treatment (within the meaning of A.P.B. No. 16 or any successor thereto); provided, however, that the cancellation of such Limited Stock Appreciation Rights shall be subject to the following conditions: (i) the existence of the Limited Stock Appreciation Rights would (in the opinion of the firm of independent certified public accountants regularly engaged to audit the Company's financial statements) render the transaction ineligible for pooling of interests accounting treatment; (ii) the cancellation of the Limited Stock Appreciation Rights would (in the opinion of the firm of independent certified public accountants regularly engaged to audit the Company's financial statements) render the transaction eligible for pooling of interests accounting treatment; (iii) the transaction is, in fact, consummated; and (iv) the written agreement providing for the transaction provides for each Person to whom a Limited Stock Appreciation Right has been granted to receive, upon the effective date of such transaction, property with a fair market value at least equal to the monetary payment that would be made upon exercise of the Limited Stock Appreciation Right. ARTICLE V AMENDMENT AND TERMINATION Section 5.1 Termination. The Board may suspend or terminate the Plan in whole or in part at any time prior to the tenth anniversary of the Effective Date by giving written notice of such suspension or termination to the Committee. Unless sooner terminated, the Plan shall terminate automatically on the day preceding the tenth anniversary of the Effective Date. In the event of any suspension or termination of the Plan, all Options theretofore granted under the Plan that are outstanding on the date of such suspension or termination of the Plan shall remain outstanding under the terms of the Option agreements granting such Options. Section 5.2 Amendment. The Board may amend or revise the Plan in whole or in part at any time; provided, however, that if the amendment or revision: (a) materially increases the benefits accruing under the Plan; (b) materially increases the number of Shares which may be issued under the Plan; or (c) materially modifies the requirements as to eligibility for Options under the Plan; such amendment or revision shall be subject to approval by the shareholders of the Company. 9 Section 5.3 Adjustments in the Event of a Business Reorganization. (a) In the event of any merger, consolidation, or other business reorganization in which the Company is the surviving entity, and in the event of any stock split, stock dividend or other event generally affecting the number of Shares held by each Person who is then a holder of record of Shares, the number of Shares covered by each outstanding Option and the number of Shares available pursuant to section 4.2 shall be adjusted to account for such event. Such adjustment shall be effected by multiplying such number of Shares by an amount equal to the number of Shares that would be owned after such event by a Person who, immediately prior to such event, was the holder of record of one Share, and the Exercise Price of the Options shall be adjusted by dividing the Exercise Price by such number of Shares; provided, however, that the Committee may, in its discretion, establish another appropriate method of adjustment. (b) In the event of any merger, consolidation, or other business reorganization in which the Company is not the surviving entity: (i) any Options granted under the Plan which remain outstanding may be canceled as of the effective date of such merger, consolidation, business reorganization, liquidation or sale by the Board upon 30 days' written notice to each Option holder in advance of the effective date of such event; and (ii) any Option which is not canceled pursuant to section 5.3(b)(i) shall be adjusted in such manner as the Committee shall deem appropriate to account for such merger, consolidation or other business reorganization. ARTICLE VI MISCELLANEOUS Section 6.1 Status as an Employee Benefit Plan. This Plan is not intended to satisfy the requirements for qualification under section 401(a) of the Code or to satisfy the definitional requirements for an "employee benefit plan" under section 3(3) of the Employee Retirement Income Security Act of 1974, as amended. It is intended to be a non-qualified incentive compensation program that is exempt from the regulatory requirements of the Employee Retirement Income Security Act of 1974, as amended. The Plan shall be construed and administered so as to effectuate this intent. Section 6.2 No Right to Continued Employment. Neither the establishment of the Plan nor any provisions of the Plan nor any action of the Board or the Committee with respect to the Plan shall be held or construed to confer upon any Eligible Individual any right to a continuation of employment by the Company. The Company reserves the right to dismiss any Eligible Individual or otherwise deal with any Eligible Individual to the same extent as though the Plan had not been adopted. Section 6.3 Construction of Language. Whenever appropriate in the Plan, words used in the singular may be read in the plural, words used in the plural may be read in the singular, and words importing the masculine gender may be read as referring equally to the feminine or the neuter. Any reference to an Article or section number shall refer to an Article or section of this Plan unless otherwise indicated. Section 6.4 Governing Law. The Plan shall be construed, administered and enforced according to the laws of the State of New York without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by federal law. 10 Section 6.5 Headings. The headings of Articles and sections are included solely for convenience of reference. If there is any conflict between such headings and the text of the Plan, the text shall control. Section 6.6 Non-Alienation of Benefits. The right to receive a benefit under the Plan shall not be subject in any manner to anticipation, alienation or assignment, nor shall such right be liable for or subject to debts, contracts, liabilities, engagements or torts, except as required pursuant to a Qualified Domestic Relations Order or as otherwise permitted pursuant to section 4.7(a). Section 6.7 Taxes. The Company shall have the right to deduct from all amounts paid by the Company in cash with respect to an Option under the Plan any taxes required by law to be withheld with respect to such Option. Where any Person is entitled to receive Shares pursuant to the exercise of an Option, the Company shall have the right to require such Person to pay the Company the amount of any tax which the Company is required to withhold with respect to such Shares, or, in lieu thereof, to retain, or to sell without notice, a sufficient number of Shares to cover the amount required to be withheld. Section 6.8 Approval of Shareholders. The Plan and all Options and Limited Stock Appreciation Rights granted hereunder shall be conditioned on the approval of the Plan by the shareholders of Astoria Financial Corporation. No Option or Limited Stock Appreciation Rights granted under the Plan shall be effective, nor shall any such Option or Limited Stock Appreciation Rights be exercised or any Shares issued or purchased, prior to such approval. Section 6.9 Notices. Any communication required or permitted to be given under the Plan, including any notice, direction, designation, comment, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below, or at such other address as one such party may by written notice specify to the other party: (a) If to the Committee: Astoria Financial Corporation One Astoria Federal Plaza Lake Success, New York 11042-1085 Attention: Corporate Secretary (b) If to an Option holder, to the Option holder's address as shown in the Company's personnel records. 11 EX-10 5 ex10-15.txt EXHIBIT 10.15 Exhibit 10.15 1999 Stock Option Plan for Outside Directors of Astoria Financial Corporation (As amended January 24, 2001) (As amended December 29, 2005) ARTICLE I PURPOSE Section 1.1 General Purpose of the Plan. The purpose of the Plan is to promote the growth and profitability of Astoria Financial Corporation, to provide Eligible Directors of Astoria Financial Corporation and affiliates with an incentive to achieve corporate objectives, to attract and retain key directors of outstanding competence and to provide such Eligible Directors with an equity interest in Astoria Financial Corporation. ARTICLE II DEFINITIONS The following definitions shall apply for the purposes of this Plan, unless a different meaning is plainly indicated by the context: Section 2.1 Association means Astoria Federal Savings and Loan Association, a federally chartered savings institution, and any successor thereto. Section 2.2 Board means the board of directors of Astoria Financial Corporation. Section 2.3 Change in Control of the Company means any of the following events: (a) approval by the stockholders of Astoria Financial Corporation of a transaction that would result in the reorganization, merger or consolidation of Astoria Financial Corporation with one or more other persons, other than a transaction following which: (i) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in Astoria Financial Corporation; and (ii) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of Astoria Financial Corporation; (b) the acquisition of all or substantially all of the assets of Astoria Financial Corporation or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1 Exchange Act) of 20% or more of the outstanding securities of Astoria Financial Corporation entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the stockholders of Astoria Financial Corporation of any transaction which would result in such an acquisition; (c) a complete liquidation or dissolution of Astoria Financial Corporation, or approval by the stockholders of Astoria Financial Corporation of a plan for such liquidation or dissolution; (d) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board of Directors of Astoria Financial Corporation do not belong to any of the following groups: (i) individuals who were members of the Board of Directors of Astoria Financial Corporation on the date of this Agreement; or (ii) individuals who first became members of the Board of Directors of Astoria Financial Corporation after the date of this Agreement either: (A) upon election to serve as a member of the Board of Directors of Astoria Financial Corporation by affirmative vote of three-quarters of the members of such Board, or of a nominating committee thereof, in office at the time of such first election; or (B) upon election by the stockholders of Astoria Financial Corporation to serve as a member of the Board of Directors of Astoria Financial Corporation, but only if nominated for election by affirmative vote of three-quarters of the members of the Board of Directors of Astoria Financial Corporation, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of Directors of Astoria Financial Corporation; or (e) any event which would be described in section 2.3(a), (b), (c) or (d) if the term "Association" were substituted for the term "Astoria Financial Corporation" therein. In no event, however, shall a Change in Control be deemed to have occurred as a result of any acquisition of securities or assets of Astoria Financial Corporation, the Association, or a subsidiary of either of them, by Astoria Financial Corporation, the Association, or a subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this section 2.4, the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. Section 2.4 Code means the Internal Revenue Code of 1986 (including the corresponding provisions of any succeeding law). Section 2.5 Committee means the Committee described in section 3.1. Section 2.6 Company means Astoria Financial Corporation, a corporation organized and existing under the laws of the State of Delaware, and any successor thereto, the Association and any successor thereto and, with 2 the prior approval of the Board, and subject to such terms and conditions as may be imposed by the Board, any other savings bank, savings and loan association, bank, corporation, financial institution or other business organization or institution. Section 2.7 Disability means a condition of total incapacity, mental or physical, for further performance of duty with the Company which the Committee shall have determined, on the basis of competent medical evidence, is likely to be permanent. Section 2.8 Effective Date means the date on which the Plan is approved by the holders of a majority of the Shares represented in person or by proxy at a meeting duly called and held. Section 2.9 Eligible Director means a member of the Board who is not also an employee or an officer of the Company. Section 2.10 Exchange Act means the Securities Exchange Act of 1934. Section 2.11 Exercise Price means the price per Share at which Shares subject to an Option may be purchased upon exercise of the Option, determined in accordance with section 4.3. Section 2.12 Fair Market Value means, with respect to a Share on a specified date: (a) the final quoted sales price on the date in question (or if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) as reported in the principal consolidated reporting system with respect to securities listed or admitted to trading on the principal United States securities exchange on which the Shares are listed or admitted to trading; or (b) if the Shares are not listed or admitted to trading on any such exchange, the closing bid quotation with respect to a Share on such date on the National Association of Securities Dealers Automated Quotations System, or, if no such quotation is provided, on another similar system, selected by the Committee, then in use; or (c) if sections 2.12(a) and (b) are not applicable, the fair market value of a Share as the Committee may determine. Section 2.13 Limited Stock Appreciation Right means a right granted pursuant to section 4.7. Section 2.14 Option means a right to purchase Shares that is granted pursuant to section 4.1. Section 2.15 Option Period means the period during which an Option may be exercised, determined in accordance with section 4.4. Section 2.16 Person means an individual, a corporation, a bank, a savings bank, a savings and loan association, a financial institution, a partnership, an association, a joint-stock company, a trust, an estate, an unincorporated organization and any other business organization or institution. Section 2.17 Plan means the 1999 Stock Option Plan for Outside Directors of Astoria Financial Corporation, as amended from time to time. Section 2.18 Qualified Domestic Relations Order means a Domestic Relations Order that: (a) clearly specifies (i) the name and last known mailing address of the Option holder and of each person given rights under such Domestic Relations Order, (ii) the amount or percentages of the Option holder's benefits under this Plan to be paid to each person covered by such Domestic Relations Order, (iii) the number of payments or the period to which such 3 Domestic Relations Order applies, and (iv) the name of this Plan; and (b) does not require the payment of a benefit in a form or amount that is (i) not otherwise provided for under the Plan, or (ii) inconsistent with a previous Qualified Domestic Relations Order. For the purposes of this Plan, a "Domestic Relations Order" means a judgment, decree or order (including the approval of a property settlement) that is made pursuant to a state domestic relations or community property law and relates to the provision of child support, alimony payments, or marital property rights to a spouse, child or other dependent of an Option holder. Section 2.19 Share means a share of Common Stock, par value $.01 per share of Astoria Financial Corporation. ARTICLE III ADMINISTRATION Section 3.1 Committee. The Plan shall be administered by a Committee which shall be the Compensation Committee of Astoria Financial Corporation. Section 3.2 Committee Action. The Committee shall hold such meetings, and may make such administrative rules and regulations, as it may deem proper. A majority of the members of the Committee shall constitute a quorum, and the action of a majority of the members of the Committee present at a meeting at which a quorum is present, as well as actions taken pursuant to the unanimous written consent of all of the members of the Committee without holding a meeting, shall be deemed to be actions of the Committee. All actions of the Committee shall be final and conclusive and shall be binding upon the Company and all other interested parties. Any Person dealing with the Committee shall be fully protected in relying upon any written notice, instruction, direction or other communication signed by the secretary of the Committee and one member of the Committee, by two members of the Committee or by a representative of the Committee authorized to sign the same in its behalf. Section 3.3 Committee Responsibilities. Subject to the terms and conditions of the Plan and such limitations as may be imposed from time to time by the Board, the Committee shall be responsible for the overall management and administration of the Plan and shall have such authority as shall be necessary or appropriate in order to carry out its responsibilities, including, without limitation, the authority: (a) to interpret and construe the Plan, and to determine all questions that may arise under the Plan as to eligibility for participation in the Plan, the number of Shares subject to the Options to be granted, and the terms and conditions thereof; (b) to adopt rules and regulations and to prescribe forms for the operation and administration of the Plan; and (c) to take any other action not inconsistent with the provisions of the Plan that it may deem necessary or appropriate. ARTICLE IV OPTION GRANTS Section 4.1 Available Shares. Subject to section 5.3, the maximum aggregate number of Shares with respect to which Options may be granted at any time shall be equal to the excess of: (a) 175,000 Shares; over 4 (b) the sum of: (i) the number of Shares with respect to which previously granted Options may then or may in the future be exercised; plus (ii) the number of Shares with respect to which previously granted Options have been exercised. For purposes of this section 4.1, an Option shall not be considered as having been exercised to the extent that such Option terminates by reason other than the purchase of the related Shares. Section 4.2 Option Grants. (a) Following the Effective Date, a Person who becomes an Eligible Director subsequent to the Effective Date shall be granted, on the 15th day of the month following the month in which such individual becomes an Eligible Director (or, if such date is not a business day, the first business day thereafter), an Option to purchase 4,000 Shares. No Eligible Director shall be granted more than one Option pursuant to this section 4.2(a). (b) Subject to sections 4.2(c) and 4.1, on January 15, 2000 and on January 15 of each calendar year during which the Plan is in effect (or, if such date is not a business day, the first business day thereafter), each Person who is an Eligible Director on such date shall be granted an Option to purchase 2,000 Shares. (c) Notwithstanding sections 4.2(a) and (b), in the event that, as of the first business day of any calendar month, the number of available Shares determined under section 4.1 is less than the total number of Shares with respect to which Options would be granted under sections 4.2(a) and (b) during such month, each Eligible Director scheduled to receive a grant of Options during such month shall be granted an Option for the number of whole Shares determined by multiplying (i) the number of Shares with respect to which the Eligible Director would have been granted an Option on such date by (ii) a fraction, the numerator of which is the number of Shares that are then available under section 4.1 and the denominator of which is the total number of Shares that would have to have been available under section 4.1 in order to grant all of the Options that would otherwise have been granted under sections 4.2(a) and (b) during such month, and rounding to the nearest whole Share; provided, however, that if rounding will require more Shares to be available than provided in section 4.1, then the amount determined pursuant to this section 4.2(c) will be calculated by rounding down to the lesser whole number. (d) Any Option granted under this section 4.2 shall be evidenced by a written agreement which shall specify the number of Shares covered by the Option, the Exercise Price for the Shares subject to the Option, the Option Period, all as determined pursuant to this Article IV. The Option agreement shall also set forth specifically or incorporate by reference the applicable provisions of the Plan. Section 4.3 Exercise Price. The price per Share at which an Option granted to an Eligible Director under section 4.2 may be exercised shall be the Fair Market Value of a Share on the date on which the Option is granted. Section 4.4 Option Period. The Option Period during which an Option granted to an Eligible Director under section 4.2 may be exercised shall commence on the date the Option is granted and shall expire on the earlier of: (i) the last day of the one-year period commencing on the date the Eligible Director ceases to be a director of the Company for any reason other than removal for cause in accordance with the Company's bylaws; (ii) removal for cause in accordance with the Company's bylaws; or 5 (iii) the last day of the ten-year period commencing on the date on which the Option was granted. Section 4.5 Method of Exercise. (a) Subject to the limitations of the Plan and the Option agreement, an Option holder may, at any time during the Option Period, exercise his right to purchase all or any part of the Shares to which the Option relates; provided, however, that the minimum number of Shares which may be purchased at any time shall be 100, or, if less, the total number of Shares relating to the Option which remain unpurchased. An Option holder shall exercise an Option to purchase Shares by: (i) giving written notice to the Committee, in such form and manner as the Committee may prescribe, of his intent to exercise the Option; (ii) delivering to the Committee full payment, consistent with section 4.5(b), for the Shares as to which the Option is to be exercised; and (iii) satisfying such other conditions as may be prescribed in the Option agreement. (b) The Exercise Price of Shares to be purchased upon exercise of any Option shall be paid in full (i) in cash (by certified or bank check or such other instrument as the Company may accept); (ii) in the form of Shares already owned beneficially for a period of more than six months by the Option holder having an aggregate Fair Market Value on the date the Option is exercised equal to the aggregate Exercise Price to be paid; or (iii) by a combination thereof. Payment for any Shares to be purchased upon exercise of an Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. (c) When the requirements of section 4.5(a) and (b) have been satisfied, the Committee shall take such action as is necessary to cause the issuance of a stock certificate evidencing the Option holder's ownership of such Shares. The Person exercising the Option shall have no right to vote or to receive dividends, nor have any other rights with respect to the Shares, prior to the date as of which such Shares are transferred to such Person on the stock transfer records of the Company, and no adjustments shall be made for any dividends or other rights for which the record date is prior to the date as of which such transfer is effected, except as may be required under section 5.3. Section 4.6 Limitations on Options. (a) An Option by its terms shall not be transferable by the Option holder other than by will or the laws of descent and distribution, or pursuant to the terms of a Qualified Domestic Relations Order, and shall be exercisable, during the life of the Option holder, only by the Option holder or an alternate payee designated pursuant to such a Qualified Domestic Relations Order; provided, however, that an Eligible Director may, at any time at or after the grant of an Option under the Plan, apply to the Committee for approval to transfer all or any portion of such Option which is then unexercised to such Eligible Director's spouse, and the lineal ascendents and lineal descendants of such Eligible Director or his spouse, or any one or more of them, or to an entity wholly owned by (including but not limited to a trust the exclusive beneficiaries of which are) one or more of them or wholly owned jointly by one or more of them and the Eligible Director. The Committee may approve or withhold approval of such transfer in its sole and absolute discretion. If such transfer is approved, it shall be effected by written notice to the Company given in such form and manner as the Committee may prescribe and actually received by the Company prior to the death of the person giving it. Thereafter, the transferee shall have with respect to such Option, all of the rights, privileges and obligations which would attach thereunder to the transferor. If a privilege of the Option depends on the life, employment or other status of the transferor, such privilege of the Option for the transferee shall continue to depend upon the life, employment or other status of the transferor. The Committee shall have full and exclusive authority to interpret and apply the provisions of the Plan to transferees to the extent not specifically addressed herein. 6 (b) The Company's obligation to deliver Shares with respect to an Option shall, if the Company so requests, be conditioned upon the receipt of a representation as to the investment intention of the Person to whom such Shares are to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply with the provisions of applicable federal, state or local law. It may be provided that any such representation shall become inoperative upon a registration of the Shares or upon the occurrence of any other event eliminating the necessity of such representation. The Company shall not be required to deliver any Shares under the Plan prior to (i) the admission of such Shares to listing on any stock exchange on which Shares may then be listed, or (ii) the completion of such registration or other qualification under any state or federal law, rule or regulation as the Company shall determine to be necessary or advisable. Section 4.7 Change in Control Cash Out. (a) Each Option granted under this Plan shall be accompanied by a Limited Stock Appreciation Right that is exercisable at the times and upon the terms and conditions set forth herein. Each Limited Stock Appreciation Right granted hereunder shall be exercisable for a period commencing on the date on which a Change in Control of the Company occurs and ending six (6) months after such date or, if later in the case of any Person, thirty (30) days after the earliest date on which such Person may exercise the Limited Stock Appreciation Right without subjecting himself to liability under section 16 of the Securities Exchange Act of 1934, as amended. A Person in possession of a Limited Stock Appreciation Right granted hereunder may exercise such Limited Stock Appreciation Right by: (i) giving written notice to the Committee, in such form and manner as the Committee may prescribe, of his intent to exercise the Limited Stock Appreciation Right; and (ii) agreeing in such written notice to the cancellation of Options then outstanding to him for a number of Shares equal to the number of Shares for which the Limited Stock Appreciation Right is being exercised. Except as provided in section 4.7(c), within ten (10) days after giving of such a notice, the Committee shall cause the Company to deliver to such person in the discretion of the Committee either (i) a monetary payment in an amount per Share equal to the amount by which the Change of Control Consideration exceeds the Exercise Price per Share of each of the Options being canceled or (ii) Shares or other property with a fair market value at least equal to the monetary payment provided for in subparagraph (i) above. (b) For purposes of section 4.7(a), the term Change in Control Consideration shall mean the greater of (i) the highest price per Share paid by any Person who initiated or sought to effect the Change in Control for a Share during the period of one (1) year ending on the date of the relevant Change in Control of the Company; and (ii) the average Fair Market Value of a Share over the last ten (10) trading days preceding the date of exercise of the Limited Stock Appreciation Right. (c) Notwithstanding anything herein contained to the contrary, the Limited Stock Appreciation Rights granted hereunder shall be canceled immediately prior to the effective time of a Change in Control of the Company resulting from a transaction between the Company and another party pursuant to a written agreement whereby the consummation of the transaction is conditioned upon the availability of "pooling of interests" accounting treatment (within the meaning of A.P.B. No. 16 or any successor thereto); provided, however, that the cancellation of such Limited Stock Appreciation Rights shall be subject to the following conditions: (i) the existence of the Limited Stock Appreciation Rights would (in the opinion of the firm of independent certified public accountants regularly engaged to audit the Company's financial statements) render the transaction ineligible for pooling of interests accounting treatment; (ii) the cancellation of the Limited Stock Appreciation Rights would (in the opinion of the firm of independent certified public accountants regularly engaged to audit the Company's financial statements) render the transaction eligible for pooling of interests accounting treatment; 7 (iii) the transaction is, in fact, consummated; and (iv) the written agreement providing for the transaction provides for each Person to whom a Limited Stock Appreciation Right has been granted to receive, upon the effective date of such transaction, property other than cash with a fair market value at least equal to the monetary payment that would be made upon exercise of the Limited Stock Appreciation Right. ARTICLE V AMENDMENT AND TERMINATION Section 5.1 Termination. The Board may suspend or terminate the Plan in whole or in part at any time prior to the tenth anniversary of the Effective Date by giving written notice of such suspension or termination to the Committee. Unless sooner terminated, the Plan shall terminate automatically on the day preceding the tenth anniversary of the Effective Date. In the event of any suspension or termination of the Plan, all Options theretofore granted under the Plan that are outstanding on the date of such suspension or termination of the Plan shall remain outstanding under the terms of the Option agreements evidencing such Options. Section 5.2 Amendment. The Board may amend or revise the Plan in whole or in part at any time; provided, however, that if the amendment or revision: (a) materially increases the benefits accruing under the Plan; (b) materially increases the number of Shares which may be issued under the Plan; or (c) materially modifies the requirements as to eligibility for Options under the Plan; such amendment or revision shall be subject to approval by the shareholders of the Company. Section 5.3 Adjustments in the Event of a Business Reorganization. (a) In the event of any merger, consolidation, or other business reorganization in which the Company is the surviving entity, and in the event of any stock split, stock dividend or other event generally affecting the number of Shares held by each Person who is then a holder of record of Shares, the number of Shares covered by each outstanding Option and the number of Shares available pursuant to section 4.1 shall be adjusted to account for such event. Such adjustment shall be effected by multiplying such number of Shares by an amount equal to the number of Shares that would be owned after such event by a Person who, immediately prior to such event, was the holder of record of one Share, and the Exercise Price of the Options shall be adjusted by dividing the Exercise Price by such number of Shares; provided, however, that the Committee may, in its discretion, establish another appropriate method of adjustment. (b) In the event of any merger, consolidation, or other business reorganization in which the Company is not the surviving entity: (i) any Options granted under the Plan which remain outstanding may be canceled as of the effective date of such merger, consolidation, business reorganization, liquidation or sale by the Board upon 30 days' written notice to each Option holder in advance of the effective date of such event; and (ii) any Option which is not canceled pursuant to section 5.3(b)(i) shall be adjusted in such manner as the Committee shall deem appropriate to account for such merger, consolidation or other business reorganization. 8 ARTICLE VI MISCELLANEOUS Section 6.1 Status as an Employee Benefit Plan. This Plan is not intended to satisfy the requirements for qualification under section 401(a) of the Code or to satisfy the definitional requirements for an "employee benefit plan" under section 3(3) of the Employee Retirement Income Security Act of 1974, as amended. It is intended to be a non-qualified incentive compensation program for self-employed individuals that is exempt from the regulatory requirements of the Employee Retirement Income Security Act of 1974, as amended. The Plan shall be construed and administered so as to effectuate this intent. Section 6.2 No Right to Continued Employment. Neither the establishment of the Plan nor any provisions of the Plan nor any action of the Board or the Committee with respect to the Plan shall be held or construed to confer upon any Eligible Director any right to a continuation of his position as a director of the Company. The Company reserves the right to remove any Eligible Director or otherwise deal with any Eligible Director to the same extent as though the Plan had not been adopted. Section 6.3 Construction of Language. Whenever appropriate in the Plan, words used in the singular may be read in the plural, words used in the plural may be read in the singular, and words importing the masculine gender may be read as referring equally to the feminine or the neuter. Any reference to an Article or section number shall refer to an Article or section of this Plan unless otherwise indicated. Section 6.4 Governing Law. The Plan shall be construed, administered and enforced according to the laws of the State of New York without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by federal law. Section 6.5 Headings. The headings of Articles and sections are included solely for convenience of reference. If there is any conflict between such headings and the text of the Plan, the text shall control. Section 6.6 Non-Alienation of Benefits. The right to receive a benefit under the Plan shall not be subject in any manner to anticipation, alienation or assignment, nor shall such right be liable for or subject to debts, contracts, liabilities, engagements or torts, except as required by a Qualified Domestic Relations Order or as otherwise permitted pursuant to section 4.6(a). Section 6.7 Taxes. The Company shall have the right to deduct from all amounts paid by the Company in cash with respect to an Option under the Plan any taxes required by law to be withheld with respect to such Option. Where any Person is entitled to receive Shares pursuant to the exercise of an Option, the Company shall have the right to require such Person to pay the Company the amount of any tax which the Company is required to withhold with respect to such Shares, or, in lieu thereof, to retain, or to sell without notice, a sufficient number of Shares to cover the amount required to be withheld. Section 6.8 Approval of Shareholders. The Plan and all Options and Limited Stock Appreciation Rights granted hereunder shall be conditioned on the approval of the Plan by the shareholders of Astoria Financial Corporation. No Option or Limited Stock Appreciation Right granted under the Plan shall be effective, nor shall any such Option or Limited Stock Appreciation Right be exercised or any Shares issued or purchased, prior to such approval. Section 6.9 Notices. Any communication required or permitted to be given under the Plan, including any notice, direction, 9 designation, comment, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below, or at such other address as one such party may by written notice specify to the other party: (a) If to the Compensation Committee: Astoria Financial Corporation One Astoria Federal Plaza Lake Success, New York 11042-1085 Attention: Corporate Secretary (b) If to an Option holder, to the Option holder's address as shown in the Company's records. 10 EX-10 6 ex10-16.txt EXHIBIT 10.16 Exhibit 10.16 2003 Stock Option Plan for Officers and Employees of Astoria Financial Corporation (As amended December 29, 2005) ARTICLE I PURPOSE Section 1.1 General Purpose of the Plan. The purpose of the Plan is to promote the growth and profitability of Astoria Financial Corporation, to provide certain key officers and employees of Astoria Financial Corporation and affiliates with an incentive to achieve corporate objectives, to attract and retain key individuals of outstanding competence and to provide such individuals with an equity interest in Astoria Financial Corporation. ARTICLE II DEFINITIONS The following definitions shall apply for the purposes of this Plan, unless a different meaning is plainly indicated by the context: Section 2.1 Association means Astoria Federal Savings and Loan Association, a federally chartered savings institution, and any successor thereto. Section 2.2 Board means the board of directors of Astoria Financial Corporation. Section 2.3 Change in Control of the Company means any of the following events: (a) approval by the stockholders of Astoria Financial Corporation of a transaction that would result in the reorganization, merger or consolidation of Astoria Financial Corporation with one or more other persons, other than a transaction following which: (i) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in Astoria Financial Corporation; and (ii) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of Astoria Financial Corporation; (b) the acquisition of all or substantially all of the assets of Astoria Financial Corporation or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the -1- Exchange Act) of 20% or more of the outstanding securities of Astoria Financial Corporation entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the stockholders of Astoria Financial Corporation of any transaction which would result in such an acquisition; (c) a complete liquidation or dissolution of Astoria Financial Corporation, or approval by the stockholders of Astoria Financial Corporation of a plan for such liquidation or dissolution; (d) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board of Directors of Astoria Financial Corporation do not belong to any of the following groups: (i) individuals who were members of the Board of Directors of Astoria Financial Corporation on the date of this Agreement; or (ii) individuals who first became members of the Board of Directors of Astoria Financial Corporation after the date of this Agreement either: (A) upon election to serve as a member of the Board of Directors of Astoria Financial Corporation by affirmative vote of three-quarters of the members of such Board, or of a nominating committee thereof, in office at the time of such first election; or (B) upon election by the stockholders of Astoria Financial Corporation to serve as a member of the Board of Astoria Financial Corporation, but only if nominated for election by affirmative vote of three-quarters of the members of the Board of Directors of Astoria Financial Corporation, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of Astoria Financial Corporation; or (e) any event which would be described in section 2.3(a), (b), (c) or (d) if the term "Association" were substituted for the term "Company" therein. In no event, however, shall a Change in Control be deemed to have occurred as a result of any acquisition of securities or assets of Astoria Financial Corporation, the Association, or a subsidiary of either of them, by Astoria Financial Corporation, the Association, or a subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this section 2.3, the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. Section 2.4 Code means the Internal Revenue Code of 1986, as amended (including the corresponding provisions of any succeeding law). Section 2.5 Committee means the Committee described in section 3.1. Section 2.6 Company means Astoria Financial Corporation, a corporation organized and -2- existing under the laws of the State of Delaware, and any successor thereto, the Association and any successor thereto and, with the prior approval of the Board, and subject to such terms and conditions as may be imposed by the Board, any other savings bank, savings and loan association, bank, corporation, financial institution or other business organization or institution. Section 2.7 Disability means a condition of total incapacity, mental or physical, for further performance of duty with the Company which the Committee shall have determined, on the basis of competent medical evidence, is likely to be permanent. Section 2.8 Disinterested Board Member means a member of the Board who (a) is not a current employee of the Company, (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year, (c) has not been an officer of the Company, (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director and (e) is not currently and for a period of at least one year has not been eligible for discretionary awards under any stock compensation plan of the Company. The term Disinterested Board Member shall be interpreted in such manner as shall be necessary to conform to the requirements of section 162(m) of the Code and Rule 16b-3 promulgated under the Exchange Act. Section 2.9 Effective Date means the date on which the Plan is approved by the holders of a majority of the Shares represented in person or by proxy at a meeting of the voting stockholders of Astoria Financial Corporation duly called and held. Section 2.10 Eligible Individual means any individual whom the Committee may determine to be a key officer or employee of the Company and select to receive a grant of an Option pursuant to the Plan. Section 2.11 Exchange Act means the Securities Exchange Act of 1934. Section 2.12 Exercise Price means the price per Share at which Shares subject to an Option may be purchased upon exercise of the Option, determined in accordance with section 4.4. Section 2.13 Fair Market Value means, with respect to a Share on a specified date: (a) the final quoted sales price on the date in question (or if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) as reported in the principal consolidated reporting system with respect to securities listed or admitted to trading on the principal United States securities exchange on which the Shares are listed or admitted to trading; or (b) if the Shares are not listed or admitted to trading on any such exchange, the closing bid quotation with respect to a Share on such date on the National Association of Securities Dealers Automated Quotations System, or, if no such quotation is provided, on another similar system, selected by the Committee, then in use; or (c) if sections 2.13(a) and (b) are not applicable, the fair market value of a Share as the Committee may determine. Section 2.14 Incentive Stock Option means a right to purchase Shares that is granted pursuant to section 4.1, that is designated by the Committee to be an Incentive Stock Option and that is intended to satisfy the requirements of section 422A of the Code. Section 2.15 Limited Stock Appreciation Right means a right granted pursuant to section 4.9. -3- Section 2.16 Non-Qualified Stock Option means a right to purchase Shares that is granted pursuant to section 4.1, that is designated by the Committee to be a Non-Qualified Stock Option and that is not intended to satisfy the requirements of section 422A of the Code. Section 2.17 Option means either an Incentive Stock Option or a Non-Qualified Stock Option. Section 2.18 Option Period means the period during which an Option may be exercised, determined in accordance with section 4.5. Section 2.19 Person means an individual, a corporation, a bank, a savings bank, a savings and loan association, a financial institution, a partnership, an association, a joint-stock company, a trust, an estate, an unincorporated organization and any other business organization or institution. Section 2.20 Plan means the 2003 Stock Option Plan for Officers and Employees of Astoria Financial Corporation, as amended from time to time. Section 2.21 Qualified Domestic Relations Order means a Domestic Relations Order that: (a) clearly specifies (i) the name and last known mailing address of the Option holder and of each person given rights under such Domestic Relations Order, (ii) the amount or percentages of the Option holder's benefits under this Plan to be paid to each person covered by such Domestic Relations Order, (iii) the number of payments or the period to which such Domestic Relations Order applies, and (iv) the name of this Plan; and (b) does not require the payment of a benefit in a form or amount that is (i) not otherwise provided for under the Plan, or (ii) inconsistent with a previous Qualified Domestic Relations Order. For the purposes of this Plan, a "Domestic Relations Order" means a judgment, decree or order (including the approval of a property settlement) that is made pursuant to a state domestic relations or community property law and relates to the provision of child support, alimony payments, or marital property rights to a spouse, child or other dependent of an Option holder. Section 2.22 Retirement means retirement at the normal or early retirement date as set forth in any tax-qualified retirement/pension plan of the Association. Section 2.23 Share means a share of Common Stock, par value $.01 per share, of Astoria Financial Corporation. Section 2.24 Termination for Cause means the termination upon an intentional failure to perform stated duties, breach of a fiduciary duty involving personal dishonesty, which results in material loss to the Company or one of its affiliates or willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final case-and-desist order which results in material loss to the Company or one of its affiliates. Section 2.25 Threatened Change in Control means (a) the circulation of a proxy statement by any Person other than management of Astoria Financial Corporation seeking stockholder approval of a transaction that would result in a Change in Control of the Company or (b) the commencement of a tender offer (within the meaning of section 14 of the Exchange Act) which, if consummated, would result in a Change in Control of the Company. -4- ARTICLE III ADMINISTRATION Section 3.1 Committee. The Plan shall be administered by a Committee consisting of the members of the Compensation Committee of Astoria Financial Corporation who are Disinterested Board Members. If fewer than three members of the Compensation Committee are Disinterested Board Members, then the Board shall appoint to the Committee such additional Disinterested Board Members as shall be necessary to provide for a Committee consisting of at least three Disinterested Board Members. Section 3.2 Committee Action. The Committee shall hold such meetings, and may make such administrative rules and regulations, as it may deem proper. A majority of the members of the Committee shall constitute a quorum, and the action of a majority of the members of the Committee present at a meeting at which a quorum is present, as well as actions taken pursuant to the unanimous written consent of all of the members of the Committee without holding a meeting, shall be deemed to be actions of the Committee. All actions of the Committee shall be final and conclusive and shall be binding upon the Company and all other interested parties. Any Person dealing with the Committee shall be fully protected in relying upon any written notice, instruction, direction or other communication signed by the secretary of the Committee and one member of the Committee, by two members of the Committee or by a representative of the Committee authorized to sign the same in its behalf. Section 3.3 Committee Responsibilities. Subject to the terms and conditions of the Plan and such limitations as may be imposed from time to time by the Board, the Committee shall be responsible for the overall management and administration of the Plan and shall have such authority as shall be necessary or appropriate in order to carry out its responsibilities, including, without limitation, the authority: (a) to interpret and construe the Plan, and to determine all questions that may arise under the Plan as to eligibility for participation in the Plan, the number of Shares subject to the Options, if any, to be granted, and the terms and conditions thereof; (b) to adopt rules and regulations and to prescribe forms for the operation and administration of the Plan; and (c) to take any other action not inconsistent with the provisions of the Plan that it may deem necessary or appropriate. ARTICLE IV STOCK OPTIONS Section 4.1 In General. Subject to the limitations of the Plan, the Committee may, in its discretion, grant to an Eligible Individual an Option to purchase Shares. Any such Option shall be evidenced by a written agreement which shall: (a) designate the Option as either an Incentive Stock Option or a Non-Qualified Stock Option; (b) specify the number of Shares covered by the Option; (c) specify the Exercise Price, determined in accordance with section 4.4, for the Shares subject to the Option; -5- (d) specify the Option Period determined in accordance with section 4.5; (e) set forth specifically or incorporate by reference the applicable provisions of the Plan; and (f) contain such other terms and conditions not inconsistent with the Plan as the Committee may, in its discretion, prescribe with respect to an Option granted to an Eligible Individual. Section 4.2 Available Shares. Subject to section 5.3, the maximum aggregate number of Shares with respect to which Options may be granted at any time shall be equal to the excess of: (a) 3,000,000 Shares; over (b) the sum of: (i) the number of Shares with respect to which previously granted Options may then or may in the future be exercised; plus (ii) the number of Shares with respect to which previously granted Options have been exercised. For purposes of this section 4.2, an Option shall not be considered as having been exercised to the extent that such Option terminates by reason other than the purchase of the related Shares. Section 4.3 Size of Option. Subject to section 4.2 and such limitations as the Board may from time to time impose, the number of Shares as to which an Eligible Individual may be granted Options shall be determined by the Committee, in its discretion. The maximum number of Shares that may be granted to any one individual under this Plan shall be the entire number of Shares then available under the Plan. Section 4.4 Exercise Price. The price per Share at which an Option granted to an Eligible Individual may be exercised shall be determined by the Committee, in its discretion; provided, however, that the Exercise Price shall not be less than (a) the Fair Market Value of a Share on the date on which the Option is granted and (b) in the case of an Option intended to be an Incentive Stock Option that is granted to an Eligible Individual who, at the time the Option is granted, owns Shares comprising more than 10% of the total combined voting power of all classes of stock of the Company, shall not be less than 110% of the Fair Market Value of a Share. Section 4.5 Option Period. The Option Period during which an Option granted to an Eligible Individual may be exercised shall commence on the date specified by the Committee in the Option agreement and shall expire on the earliest of: (a) the date specified by the Committee in the Option agreement; (b) the last day of the three-month period commencing on the date of the Eligible Individual's termination of employment with the Company, other than on account of death or Disability, Retirement or a Termination for Cause; (c) the last day of the one-year period commencing on the date of the Eligible Individual's termination of employment due to death, Disability or Retirement; -6- (d) as of the time and on the date the Eligible Individual ceases to be an employee of the Company due to a Termination for Cause; (e) the last day of the ten-year period commencing on the date on which the Option was granted; and (f) for an Option intended to be an Incentive Stock Option that is granted to an Eligible Individual who, at the time the Option is granted, owns Shares comprising more than 10% of the total combined voting power of all classes of stock of the Company, the last day of the five-year period commencing on the date on which the Option was granted; provided, however, that in the event of a Threatened Change in Control or a Change in Control of the Company while there is outstanding any Option whose Option Period has not commenced, such Option Period shall automatically commence on the earliest date on which the Threatened Change in Control or Change in Control of the Company is deemed to have occurred. Section 4.6 Method of Exercise. (a) Subject to the limitations of the Plan and the Option agreement, an Option holder may, at any time during the Option Period, exercise his right to purchase all or any part of the Shares to which the Option relates; provided, however, that the minimum number of Shares which may be purchased shall be 100, or, if less, the total number of Shares relating to the Option which remain unpurchased. An Option holder shall exercise an Option to purchase Shares by: (i) giving written notice to the Committee, in such form and manner as the Committee may prescribe, of his intent to exercise the Option; (ii) delivering to the Committee full payment, consistent with section 4.6(b), for the Shares as to which the Option is to be exercised; and (iii) satisfying such other conditions as may be prescribed in the Option agreement. (b) The Exercise Price of Shares to be purchased upon exercise of any Option shall be paid (i) in full in cash (by certified or bank check or such other instrument as the Company may accept) or; (ii) if and to the extent permitted by the Committee, in the form of Shares already owned beneficially for a period of more than six months by the Option Holder having an aggregate Fair Market Value on the date the Option is exercised equal to the aggregate Exercise Price to be paid; or (iii) by a combination thereof. Payment for any Shares to be purchased upon exercise of an Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. (c) When the requirements of section 4.6(a) and (b) have been satisfied, the Committee shall take such action as is necessary to cause the issuance of a stock certificate evidencing the Option holder's ownership of such Shares. The Person exercising the Option shall have no right to vote or to receive dividends, nor have any other rights with respect to the Shares, prior to the date as of which such Shares are transferred to such Person on the stock transfer records of the Company, and no adjustments shall be made for any dividends or other rights for which the record date is prior to the date as of which such transfer is effected, except as may be required under section 5.3. Section 4.7 Limitations on Options. (a) An Option by its terms shall not be transferable by the Option holder other than by will or the laws of descent and distribution, or pursuant to the terms of a Qualified Domestic Relations Order, and shall be exercisable, during the life of the Option holder, only by the Option holder or an alternate payee designated pursuant -7- to such a Qualified Domestic Relations Order; provided, however, that an Eligible Individual may, at any time at or after the grant of a Non-Qualified Stock Option under the Plan, apply to the Committee for approval to transfer all or any portion of such Non-Qualified Stock Option which is then unexercised to such Eligible Individual's spouse, and the lineal ascendents and lineal descendants of such Eligible Individual or his spouse, or any one or more of them, or to an entity wholly owned by (including but not limited to a trust the exclusive beneficiaries of which are) one or more of them or wholly owned jointly by one or more of them and the Eligible Individual. The Committee may approve or withhold approval of such transfer in its sole and absolute discretion. If such transfer is approved, it shall be effected by written notice to the Company given in such form and manner as the Committee may prescribe and actually received by the Company prior to the death of the person giving it. Thereafter, the transferee shall have with respect to such Non-Qualified Stock Option, all of the rights, privileges and obligations which would attach thereunder to the transferor. If a privilege of the Option depends on the life, employment or other status of the transferor, such privilege of the Option for the transferee shall continue to depend upon the life, employment or other status of the transferor. The Committee shall have full and exclusive authority to interpret and apply the provisions of the Plan to transferees to the extent not specifically addressed herein. (b) The Company's obligation to deliver Shares with respect to an Option shall, if the Committee so requests, be conditioned upon the receipt of a representation as to the investment intention of the Option holder to whom such Shares are to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply with the provisions of applicable federal, state or local law. It may be provided that any such representation shall become inoperative upon a registration of the Shares or upon the occurrence of any other event eliminating the necessity of such representation. The Company shall not be required to deliver any Shares under the Plan prior to (i) the admission of such Shares to listing on any stock exchange on which Shares may then be listed, or (ii) the completion of such registration or other qualification under any state or federal law, rule or regulation as the Committee shall determine to be necessary or advisable. Section 4.8 Additional Restrictions on Incentive Stock Options. In addition to the limitations of section 4.7, an Option designated by the Committee to be an Incentive Stock Option shall be subject to the following limitations: (a) If, for any calendar year, the sum of (i) plus (ii) exceeds $100,000, where (i) equals the Fair Market Value (determined as of the date of the grant) of Shares subject to an Option intended to be an Incentive Stock Option which first become available for purchase during such calendar year, and (ii) equals the Fair Market Value (determined as of the date of grant) of Shares subject to any other options intended to be Incentive Stock Options and previously granted to the same Eligible Individual which first become exercisable in such calendar year, then that portion of the Shares granted pursuant to such options which cause the sum of (i) and (ii) to exceed $100,000 shall be deemed to be Shares granted pursuant to a Non-Qualified Stock Option or Non-Qualified Stock Options, with the same terms as the Option or Options intended to be an Incentive Stock Option; (b) Except with the prior written approval of the Committee, no individual shall dispose of Shares acquired pursuant to the exercise of an Incentive Stock Option until after the later of (i) the second anniversary of the date on which the Incentive Stock Option was granted, or (ii) the first anniversary of the date on which the Shares were acquired. Section 4.9 Change in Control Cash Out. (a) Each Option granted under this Plan shall be accompanied by a Limited Stock Appreciation Right that is exercisable at the times and upon the terms and conditions set forth herein. Each Limited Stock Appreciation Right granted hereunder shall be exercisable for a period commencing on the date on which a Change in Control of the Company occurs and ending six (6) months after such date or, if later in the case of any Person, thirty (30) days after the earliest date on which such Person may exercise the Limited Stock Appreciation Right without subjecting himself to liability under section 16 of the Securities Exchange Act of 1934, as amended. A -8- Person in possession of a Limited Stock Appreciation Right granted hereunder may exercise such Limited Stock Appreciation Right by: (i) giving written notice to the Committee, in such form and manner as the Committee may prescribe, of his intent to exercise the Limited Stock Appreciation Right; and (ii) agreeing in such written notice to the cancellation of Options then outstanding to him for a number of Shares equal to the number of Shares for which the Limited Stock Appreciation Right is being exercised. Except as provided in section 4.9(c), within ten (10) days after giving of such a notice, the Committee shall cause the Company to deliver to such person in the discretion of the Committee either (i) a monetary payment in an amount per Share equal to the amount by which the Change of Control Consideration exceeds the Exercise Price per Share of each of the Options being canceled or (ii) Shares or other property with a fair market value at least equal to the monetary payment provided for in subparagraph (i) above. (b) For purposes of section 4.9(a), the term Change in Control Consideration shall mean the greater of (i) the highest price per Share paid by any Person who initiated or sought to effect the Change in Control for a Share during the period of one (1) year ending on the date of the relevant Change in Control of the Company; and (ii) the average Fair Market Value of a Share over the last ten (10) trading days preceding the date of exercise of the Limited Stock Appreciation Right. (c) Notwithstanding anything herein contained to the contrary, the Limited Stock Appreciation Rights granted hereunder shall be canceled immediately prior to the effective time of a Change in Control of the Company resulting from a transaction between the Company and another party pursuant to a written agreement whereby the consummation of the transaction is conditioned upon such cancellation; provided, however, that the cancellation of such Limited Stock Appreciation Rights shall be subject to the following conditions: (i) the transaction is, in fact, consummated; and (ii) the written agreement providing for the transaction provides for each Person to whom a Limited Stock Appreciation Right has been granted the right to receive, upon the effective date of such transaction, property with a fair market value at least equal to the monetary payment that would be made upon exercise of the Limited Stock Appreciation Right. Section 4.10 Prohibition Against Option Repricing Neither the Committee nor the Board shall have the right or authority following the grant of an option pursuant to the Plan the amend or modify the Exercise Price of any Shares. In the event that any option is surrendered under circumstances other than by cancellation provided in Section 4.9 or the expiration of the option by its term, shall option shall be treated for purposes of Section 4.2 as if the option to the extent so surrendered shall have been exercised and the Person who has surrendered the option shall be ineligible for any further option grants pursuant to this Plan. ARTICLE V AMENDMENT AND TERMINATION Section 5.1 Termination. The Board may suspend or terminate the Plan in whole or in part at any time prior to the tenth anniversary of the Effective Date by giving written notice of such suspension or termination to the Committee. Unless sooner terminated, the Plan shall terminate automatically on the day preceding the tenth anniversary of the Effective Date. In the event of any suspension or termination of the Plan, all Options theretofore granted under the -9- Plan that are outstanding on the date of such suspension or termination of the Plan shall remain outstanding under the terms of the Option agreements granting such Options. Section 5.2 Amendment. The Board may amend or revise the Plan in whole or in part at any time; provided, however, that if the amendment or revision: (a) materially increases the benefits accruing under the Plan; (b) materially increases the number of Shares which may be issued under the Plan; (c) modifies section 4.10 under the plan; or (d) materially modifies the requirements as to eligibility for Options under the Plan; such amendment or revision shall be subject to approval by the shareholders of the Company. Section 5.3 Adjustments in the Event of a Business Reorganization. (a) In the event of any merger, consolidation, or other business reorganization in which the Company is the surviving entity, and in the event of any stock split, stock dividend or other event generally affecting the number of Shares held by each Person who is then a holder of record of Shares, the number of Shares covered by each outstanding Option and the number of Shares available pursuant to section 4.2 shall be adjusted to account for such event. Such adjustment shall be effected by multiplying such number of Shares by an amount equal to the number of Shares that would be owned after such event by a Person who, immediately prior to such event, was the holder of record of one Share, and the Exercise Price of the Options shall be adjusted by dividing the Exercise Price by such number of Shares; provided, however, that the Committee may, in its discretion, establish another appropriate method of adjustment. (b) In the event of any merger, consolidation, or other business reorganization in which the Company is not the surviving entity: (i) any Options granted under the Plan which remain outstanding may be canceled as of the effective date of such merger, consolidation, business reorganization, liquidation or sale by the Board upon 30 days' written notice to each Option holder in advance of the effective date of such event; and (ii) any Option which is not canceled pursuant to section 5.3(b)(i) shall be adjusted in such manner as the Committee shall deem appropriate to account for such merger, consolidation or other business reorganization. ARTICLE VI MISCELLANEOUS Section 6.1 Status as an Employee Benefit Plan. This Plan is not intended to satisfy the requirements for qualification under section 401(a) of the Code or to satisfy the definitional requirements for an "employee benefit plan" under section 3(3) of the Employee Retirement Income Security Act of 1974, as amended. It is intended to be a non-qualified incentive compensation program that is exempt from the regulatory requirements of the Employee Retirement Income Security Act of 1974, as amended. The Plan shall be construed and administered so as to effectuate this intent. -10- Section 6.2 No Right to Continued Employment. Neither the establishment of the Plan nor any provisions of the Plan nor any action of the Board or the Committee with respect to the Plan shall be held or construed to confer upon any Eligible Individual any right to a continuation of employment by the Company. The Company reserves the right to dismiss any Eligible Individual or otherwise deal with any Eligible Individual to the same extent as though the Plan had not been adopted. Section 6.3 Construction of Language. Whenever appropriate in the Plan, words used in the singular may be read in the plural, words used in the plural may be read in the singular, and words importing the masculine gender may be read as referring equally to the feminine or the neuter. Any reference to an Article or section number shall refer to an Article or section of this Plan unless otherwise indicated. Section 6.4 Governing Law. The Plan shall be construed, administered and enforced according to the laws of the State of New York without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by federal law. Section 6.5 Headings. The headings of Articles and sections are included solely for convenience of reference. If there is any conflict between such headings and the text of the Plan, the text shall control. Section 6.6 Non-Alienation of Benefits. The right to receive a benefit under the Plan shall not be subject in any manner to anticipation, alienation or assignment, nor shall such right be liable for or subject to debts, contracts, liabilities, engagements or torts, except as required pursuant to a Qualified Domestic Relations Order or as otherwise permitted pursuant to section 4.7(a). Section 6.7 Taxes. The Company shall have the right to deduct from all amounts paid by the Company in cash with respect to an Option under the Plan any taxes required by law to be withheld with respect to such Option. Where any Person is entitled to receive Shares pursuant to the exercise of an Option, the Company shall have the right to require such Person to pay the Company the amount of any tax which the Company is required to withhold with respect to such Shares, or, in lieu thereof, to retain, or to sell without notice, a sufficient number of Shares to cover the amount required to be withheld. Section 6.8 Approval of Shareholders. The Plan and all Options and Limited Stock Appreciation Rights granted hereunder shall be conditioned on the approval of the Plan by the shareholders of Astoria Financial Corporation. No Option or Limited Stock Appreciation Rights granted under the Plan shall be effective, nor shall any such Option or Limited Stock Appreciation Rights be exercised or any Shares issued or purchased, prior to such approval. Section 6.9 Notices. Any communication required or permitted to be given under the Plan, including any notice, direction, designation, comment, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below, or at such other address as one such party may by written notice specify to the other party: -11- (a) If to the Committee: Astoria Financial Corporation One Astoria Federal Plaza Lake Success, New York 11042-1085 Attention: Corporate Secretary (b) If to an Option holder, to the Option holder's address as shown in the Company's personnel records. -12- EX-10 7 ex10-39.txt EXHIBIT 10.39 Exhibit 10.39 CHANGE OF CONTROL SEVERANCE AGREEMENT This CHANGE OF CONTROL SEVERANCE AGREEMENT (the "Agreement") is made and entered into as of December 21, 2005 by and among ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION, a savings and loan association organized and existing under the laws of the United States of America and having an office at One Astoria Federal Plaza, Lake Success, New York 11042 (the "Bank"), ASTORIA FINANCIAL CORPORATION, a business corporation organized and existing under the laws of the State of Delaware and having an office at One Astoria Federal Plaza, Lake Success, New York 11042 (the "Company") and Anthony S. DiCostanzo, an individual residing at 3 Beechwood Court, Dix Hills, New York 11746 (the "Officer"). INTRODUCTORY STATEMENT WHEREAS, the Boards of Directors of the Bank and the Company have approved the Bank and the Company entering into Change of Control Severance Agreements with certain key officers of the Bank, WHEREAS, the Officer is a key officer of the Bank; WHEREAS, should the possibility of a Pending Change of Control or Change of Control of the Bank or the Company arise, the Boards of Directors of the Bank and the Company believe it is imperative that the Bank, the Company and the Boards of Directors of the Bank and the Company should be able to rely upon the Officer to continue in his or her position, and that the Bank and the Company should be able to receive and rely upon the Officer's advice, if requested, as to the best interests of the Bank and the Company and their respective shareholders without concern that the Officer might be distracted by the personal uncertainties and risks created by the possibility of a Pending Change of Control or Change of Control; WHEREAS, should the possibility of a Pending Change of Control or Change of Control arise, in addition to his or her regular duties, the Officer may be called upon to assist in the assessment of such possible Pending Change of Control or Change of Control, advise management and the Board as to whether such Pending Change of Control or Change of Control would be in the best interests of the Bank, the Company and their respective shareholders, and to take such other actions as the Boards of Directors of the Bank and the Company might determine to be appropriate; and NOW, THEREFORE, to assure the Bank and the Company that they will have the continued dedication of the Officer and the availability of his or her advice and counsel notwithstanding the possibility, threat, or occurrence of a Pending Change of Control or Change of Control of the Bank or the Company, and to induce the Officer to remain in the employ of the Bank, in consideration of Page -1- the mutual premises and agreements set forth herein and for other good and valuable consideration, the Bank, the Company and the Officer agree as follows: AGREEMENT Section 1. Effective Date; Term; Pending Change of Control and Change of Control Defined. (a) This Agreement shall take effect on December 21, 2005 (the "Effective Date") and shall remain in effect during the period (the "Term") beginning on the Effective Date and ending on the earlier of: (i) the date, prior to the occurrence of a Pending Change of Control or a Change of Control, as defined below, respectively, on which the Officer's employment by the Bank terminates whether by discharge, resignation, death, disability or retirement, or (ii) the later of: (A) the first anniversary of the date on which the Bank notifies the Executive of its intent to discontinue the Agreement (the "Initial Expiration Date") or, (B) the second anniversary of the latest Change of Control, as defined below, that occurs after the Effective Date and before the Initial Expiration Date. (b) For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: (i) the consummation of a reorganization, merger or consolidation of the Company with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and Page -2- (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; (ii) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert; (iii) a complete liquidation or dissolution of the Company; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board of Directors of the Company do not belong to any of the following groups: (A) individuals who were members of the Board of Directors of the Company on the Effective Date of this Agreement; or (B) individuals who first became members of the Board of Directors of the Company after the Effective Date of this Agreement either: (1) upon election to serve as a member of the Board of Directors of the Company by affirmative vote of three-quarters of the members of such Board, or of a nominating committee thereof, in office at the time of such first election; or (2) upon election by the shareholders of the Board of Directors of the Company to serve as a member of such Board, but only if nominated for election by affirmative vote of three-quarters of the members of the Board of Directors of the Company, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A Page -3- promulgated under the Exchange Act) other than by or on behalf of the Board of Directors of the Company; or (v) any event which would be described in Section 1(b)(i), (ii), (iii) or (iv) if the term "Bank" were substituted for the term "Company" therein. In no event, however, shall a Change of Control be deemed to have occurred as a result of any acquisition of securities or assets of the Company, the Bank, or a subsidiary of either of them, by the Company, the Bank, or any subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this Section 1(b), the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. (c) For purposes of this Agreement, a "Pending Change of Control" shall mean: (i) the approval by the shareholders of the Bank or the Company of a definitive agreement for a transaction which, if consummated, would result in a Change of Control; or (ii) the approval by the shareholders of the Bank or the Company of a transaction which, if consummated, would result in a Change of Control. Section 2. Discharge Prior to a Pending Change of Control. The Bank may discharge the Officer at any time prior to the occurrence of a Pending Change of Control or, if no Pending Change of Control has occurred, a Change of Control, for any reason or for no reason. In such event: (a) The Bank shall pay to the Officer or the Officer's estate his or her earned but unpaid compensation, including, without limitation, salary and all other items which constitute wages under applicable law, as of the date of the Officer's termination of employment. This payment shall be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than 30 days after the date of the Officer's termination of employment. (b) The Bank shall provide the benefits due, if any, to the Officer or the Officer's estate, surviving dependents or designated beneficiaries, as applicable, under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the officers and employees of the Bank. The time and manner of payment or other delivery of these benefits and the recipients of such benefits shall be determined according to the terms and conditions of the applicable plans and programs. Page -4- The payments and benefits described in Sections 2(a) and (b) shall be referred to in this Agreement as the "Standard Termination Entitlements." Section 3. Termination of Employment Due to Death. The Officer's employment with the Bank shall terminate automatically, and without any further action on the part of any party to this Agreement, on the date of the Officer's death. In such event, the Bank shall pay and deliver to the Officer's estate and surviving dependents and designated beneficiaries, as applicable, the Standard Termination Entitlements. Section 4. Termination Due to Disability after a Pending Change of Control or a Change of Control. The Bank may terminate the Officer's employment during the Term and after the occurrence of a Pending Change of Control or a Change of Control upon a determination by the Board of Directors of the Bank, by the affirmative vote of 75% of its entire membership, acting in reliance on the written advice of a medical professional acceptable to it, that the Officer is suffering from a physical or mental impairment which, at the date of the determination, has prevented the Officer from performing the Officer's assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year ending with the date of the determination or is likely to result in death or prevent the Officer from performing the Officer's assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year beginning with the date of the determination. In such event: (a) The Bank shall pay and deliver the Standard Termination Entitlements to the Officer or, in the event of the Officer's death following such termination but before payment, to the Officer's estate, surviving dependents or designated beneficiaries, as applicable. (b) In addition to the Standard Termination Entitlements, the Bank shall continue to pay the Officer his or her base salary, at the annual rate in effect for the Officer immediately prior to the termination of the Officer's employment, during a period ending on the earliest of: (i) the expiration of one hundred and eighty (180) days after the date of termination of the Officer's employment; (ii) the date on which long-term disability insurance benefits are first payable to the Officer under any long-term disability insurance plan covering employees of the Bank; or (iii) the date of the Officer's death. A termination of employment due to disability under this Section 4 shall be effected by a notice of termination given to the Officer by the Bank and shall take effect on the later of the effective date of termination specified in such notice or, if no such date is specified, the date on which the notice of termination is deemed given to the Officer. Page -5- Section 5. Discharge with Cause after a Pending Change of Control or Change of Control. (a) The Bank may terminate the Officer's employment with "Cause" during the Term and after the occurrence of a Pending Change of Control or a Change of Control, but a termination shall be deemed to have occurred with "Cause" only if: (i) (A) the Board of Directors of the Bank, by the affirmative vote of 75% of its entire membership, determines that the Officer is guilty of personal dishonesty, incompetence, wilful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, wilful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, or any material breach of this Agreement, in each case measured against standards generally prevailing at the relevant time in the savings and community banking industry; (B) prior to the vote contemplated by Section 5(a)(i)(A), the Board of Directors of the Bank shall provide the Officer with notice of the Bank's intent to discharge the Officer for Cause, detailing with particularity the facts and circumstances which are alleged to constitute Cause (the "Notice of Intent to Discharge"); and (C) after the giving of the Notice of Intent to Discharge and before the taking of the vote contemplated by Section 5(a)(i)(A), the Officer, together with the Officer's legal counsel, if he so desires, are afforded a reasonable opportunity to make both written and oral presentations before the Board of Directors of the Bank for the purpose of refuting the alleged grounds for Cause for the Officer's discharge; and (D) after the vote contemplated by Section 5(a)(i)(A), the Bank has furnished to the Officer a notice of termination which shall specify the effective date of the Officer's termination of employment (which shall in no event be earlier than the date on which such notice is deemed given) and include a copy of a resolution or resolutions adopted by the Board of Directors of the Bank, certified by its corporate secretary, authorizing the termination of the Officer's employment with Cause and stating with particularity the facts and circumstances found to constitute Cause for the Officer's discharge (the "Final Discharge Notice"); or (ii) the Officer, during the 90 day period commencing on the delivery to the Officer by the Bank of the Notice of Intent to Discharge specified in Section 5(a)(i)(B), resigns his or her employment with the Bank prior to the delivery to the Officer by the Bank of the Final Discharge Notice specified in Section 5(a)(i)(D). Page -6- For purposes of this Section 5, no act or failure to act, on the part of the Officer, shall be considered "willful" unless it is done, or omitted to be done, by the Officer in bad faith or without reasonable belief that the Officer's action or omission was in the best interests of the Bank or the Company, respectively. Any act or failure to act based upon authority given pursuant to a resolution duly adopted by the Board of Directors of the Bank or the Company or based upon the written advice of counsel for the Bank or the Company shall be conclusively presumed to be done or omitted to be done by the Officer in good faith and in the best interests of the Bank or the Company, respectively. (b) If the Officer is discharged with Cause during the Term and after a Pending Change of Control or a Change of Control, the Bank shall pay and provide to him or, in the event of the Officer's death following such discharge but prior to payment and providing, to the Officer's estate, surviving dependents or designated beneficiaries, as applicable, the Standard Termination Entitlements only. (c) Following the giving of a Notice of Intent to Discharge, the Bank may temporarily suspend the Officer's duties and authority and, in such event, may also suspend the payment of salary and other cash compensation, but not the Officer's participation in retirement, insurance and other employee benefit plans. If the Officer is not discharged or is discharged without Cause within forty-five (45) days after the giving of a Notice of Intent to Discharge, payments of salary and cash compensation shall resume, and all payments withheld during the period of suspension shall be promptly restored. If the Officer is discharged with Cause not later than forty-five (45) days after the giving of the Notice of Intent to Discharge, all payments withheld during the period of suspension shall be deemed forfeited and shall not be included in the Standard Termination Entitlements. If a Final Discharge Notice is given later than forty-five (45) days, but sooner than ninety (90) days, after the giving of the Notice of Intent to Discharge, all payments made to the Officer during the period beginning with the giving of the Notice of Intent to Discharge and ending with the Officer's discharge with Cause shall be retained by the Officer and shall not be applied to offset the Standard Termination Entitlements. If the Bank does not give a Final Discharge Notice to the Officer within ninety (90) days after giving a Notice of Intent to Discharge, the Notice of Intent to Discharge shall be deemed withdrawn and any future action to discharge the Officer with Cause shall require the giving of a new Notice of Intent to Discharge. If the Officer resigns pursuant to Section 5(a)(ii), the Officer shall forfeit his or her right to suspended amounts that have not been restored as of the date of the Officer's resignation or notice of resignation, whichever is earlier. Section 6. Discharge Without Cause after a Pending Change of Control or Change of Control. The Bank may discharge the Officer without Cause at any time after the occurrence of a Pending Change of Control or a Change of Control, and in such event: Page -7- (a) The Bank shall pay and deliver the Standard Termination Entitlements to the Officer or, in the event of the Officer's death following the Officer's discharge but before payment, to the Officer's estate, surviving dependents or designated beneficiaries, as applicable. (b) In addition to the Standard Termination Entitlements: (i) the Bank shall provide for a period of two years following the date of the Officer's discharge (the "Assurance Period") for the benefit of the Officer and the Officer's spouse and dependents continued group life, health (including hospitalization, medical and major medical), dental, accident and long-term disability insurance benefits on substantially the same terms and conditions (including any co-payments and deductibles, but excluding any premium sharing arrangements, it being the intention of the parties to this Agreement that the premiums for such insurance benefits shall be the sole cost and expense of the Bank) in effect for them immediately prior to the Officer's discharge. The coverage provided under this Section 6(b)(i) may, at the election of the Bank, be secondary to the coverage provided as part of the Standard Termination Entitlements and to any employer-paid coverage provided by a subsequent employer or through Medicare, with the result that benefits under the other coverages will offset the coverage required by this Section 6(b)(i), provided, however, that for purposes of this Section 6(b)(i) benefits provided at the cost of the Officer or the Officer's spouse or dependants pursuant to the Comprehensive Omnibus Budget Reconciliation Act, as amended, shall not be considered Standard Termination Entitlements. (ii) The Bank shall make a lump sum payment to the Officer or, in the event of the Officer's death following the Officer's discharge but before payment, to the Officer's estate in an amount equal to the salary that the Officer would have earned if he had continued working for the Bank during the Assurance Period at the highest annual rate of salary achieved during the period of three (3) years ending immediately prior to the date of termination (the "Salary Severance Payment"). The Salary Severance Payment shall be computed using the following formula: SSP = BS x NY where: "SSP" is the amount of the Salary Severance Payment, before the deduction of applicable federal, state and local withholding taxes; "BS" is the highest annual rate of salary achieved by the Officer during the period of three (3) years ending immediately prior to the date of termination; and "NY" is the Assurance Period expressed as a number of years (rounded, if such period is not a whole number, to the next highest whole number). Page -8- The Salary Severance Payment shall be made within thirty (30) days after the Officer's termination of employment and shall be in lieu of any claim to a continuation of base salary which the Officer might otherwise have and in lieu of cash severance benefits under any severance benefits program which may be in effect for officers or employees of the Bank. (iii) The Bank shall make a lump sum payment to the Officer or, in the event of the Officer's death following the Officer's discharge but before payment, to the Officer's estate in an amount equal to the potential annual bonuses that the Officer would have earned if the Officer had continued working for the Bank during the Assurance Period at the highest annual rate of salary achieved during the period of three (3) years ending immediately prior to the date of termination (the "Bonus Severance Payment"). The Bonus Severance Payment shall be computed using the following formula: BSP = ((BS x TIO x IP) + ( BS x TIO x FP x AP)) x NY where: "BSP" is the amount of the Bonus Severance Payment, before the deduction of applicable federal, state and local withholding taxes; "BS" is the highest annual rate of salary achieved by the Officer during the period of three (3) years ending immediately prior to the date of termination; "TIO" is the target incentive opportunity for the Officer expressed as a percentage as established by the Compensation Committee of the Board of Directors of the Bank pursuant to the Bank's Annual Incentive Plan for Select Executives for the year in which the employment of the Officer by the Bank terminates or, if no target incentive opportunity is established by the Compensation Committee of the Board of Directors of the Bank for such year with respect to the Officer, then the highest target incentive opportunity established by the Compensation Committee of the Board of Directors of the Bank for the Officer pursuant to the Annual Incentive Plan for Select Executives during the period of three (3) years ending immediately prior to the date of termination; "IP" is either (i) the percentage of the TIO which is to be determined by the individual performance of the Officer as established by the Compensation Committee of the Board of Directors of the Bank pursuant to the Bank's Annual Incentive Plan for Select Executives for the year in which the employment of the Officer by the Bank terminates or, (ii) if no target incentive opportunity has been established with respect to the Officer by the Compensation Committee of the Board of Directors of the Bank for the year in which the employment of the Officer by the Bank terminates, then the lowest percentage of the target incentive opportunity to be determined by the Page -9- individual performance of the Officer established by the Compensation Committee of the Board of Directors of the Bank for the Officer pursuant to the Annual Incentive Plan for Select Executives during the period of three (3) years ending immediately prior to the date of termination; "FP" is either (i) the percentage of the TIO with respect to the Officer which is to be determined by the financial performance of the Company as established by the Compensation Committee of the Board of Directors of the Bank pursuant to the Bank's Annual Incentive Plan for Select Executives for the year in which the employment of the Officer by the Bank terminates or, (ii) if no target incentive opportunity has been established with respect to the Officer by the Compensation Committee of the Board of Directors of the Bank for the year in which the employment of the Officer by the Bank terminates, then a percentage equal to 100% minus the IP; "AP" is the highest award percentage available to the Officer with respect to the financial performance of the Company as established by the Compensation Committee of the Board of Directors of the Bank pursuant to the Bank's Annual Incentive Plan for Select Executives for the year in which the employment of the Officer by the Bank terminates or, (ii) if no target incentive opportunity has been established with respect to the Officer by the Compensation Committee of the Board of Directors of the Bank for the year in which the employment of the Officer by the Bank terminates, then the highest award percentage available to the Officer with respect to the financial performance of the Company established by the Compensation Committee of the Board of Directors of the Bank for the Officer pursuant to the Annual Incentive Plan for Select Executives during the period of three (3) years ending immediately prior to the date of termination; "NY" is the Assurance Period expressed as a number of years (rounded, if such period is not a whole number, to the next highest whole number). The Bonus Severance Payment shall be made within thirty (30) days after the Officer's termination of employment and shall be in lieu of any claim to a continuation of participation in annual bonus plans of the Bank which the Officer might otherwise have. The payments and benefits described in Section 6(b) are referred to in this Agreement as the "Additional Termination Entitlements". The payments described in Section 6(b)(ii) and (iii) shall be computed at the expense of the Company by an attorney of the firm of Thacher Proffitt & Wood, Two World Financial Center, New York, New York 10281or, if such firm is unavailable or unwilling to perform such calculation, by a firm of independent certified public accountants selected by the Officer and reasonably satisfactory to the Company (the "Computation Advisor"). The determination of the Computation Advisor as to the amount of such payments shall be final and binding in the absence of manifest error. Page -10- Section 7. Tax Indemnification. (a) If the Officer's employment terminates under circumstances entitling the Officer or, in the event of the Officer's death following such termination but before payment, his or her estate to the Additional Termination Entitlements, the Company shall pay to the Officer or, in the event of the Officer's death, his or her estate an additional amount (the "Tax Indemnity Payment") intended to indemnify the Officer against the financial effects of the excise tax imposed on excess parachute payments under section 28OG of the Internal Revenue Code of 1986, as amended, (the "Code"). The Tax Indemnity Payment shall be determined under the following formula: E x P TIP = ---------------------------------------- 1 - (( FI x ( 1 - SLI )) + SLI + E + M ) where: "TIP" is the Tax Indemnity Payment, before the deduction of applicable federal, state and local withholding taxes; "E" is the percentage rate at which an excise tax is assessed under section 4999 of the Code; "P" is the amount with respect to which such excise tax is assessed, determined without regard to this Section 16; "FI" is the highest marginal rate of income tax applicable to the Officer under the Code for the taxable year in question; "SLI" is the sum of the highest marginal rates of income tax applicable to the Officer under all applicable state and local laws for the taxable year in question; and "M" is the highest marginal rate of Medicare tax applicable to the Officer under the Code for the taxable year in question. Such computation shall be made at the expense of the Company by the Computation Advisor and shall be based on the following assumptions: (i) that a change in ownership, a change in effective ownership or control or a change in the ownership of a substantial portion of the assets of the Bank or the Company has occurred within the meaning of section 28OG of the Code (a "28OG Change of Control"); (ii) that all direct or indirect payments made to or benefits conferred upon the Officer on account of the Officer's termination of employment are "parachute payments" within the meaning of section 28OG of the Code; and Page -11- (iii) that no portion of such payments is reasonable compensation for services rendered prior to the Officer's termination of employment. (b) With respect to any payment that is presumed to be a parachute payment for purposes of section 28OG of the Code, the Tax Indemnity Payment shall be made to the Officer on the earlier of the date the Company, the Bank or any direct or indirect subsidiary or affiliate of the Company or the Bank is required to withhold such tax or the date the tax is required to be paid by the Officer, unless, prior to such date, the Company delivers to the Officer the written opinion (the "Opinion Letter"), in form and substance reasonably satisfactory to the Officer, of the Computation Advisor or, if the Computation Advisor is unable to provide such opinion, of an attorney or firm of independent certified public accountants selected by the Company and reasonably satisfactory to the Officer, to the effect that the Officer has a reasonable basis on which to conclude that: (i) no 28OG Change in Control has occurred, or (ii) all or part of the payment or benefit in question is not a parachute payment for purposes of section 28OG of the Code, or (iii) all or a part of such payment or benefit constitutes reasonable compensation for services rendered prior to the 28OG Change of Control, or (iv) for some other reason which shall be set forth in detail in such letter, no excise tax is due under section 4999 of the Code with respect to such payment or benefit. If the Company delivers an Opinion Letter, the Computation Advisor shall re-compute, and the Company shall make, the Tax Indemnity Payment in reliance on the information contained in the Opinion Letter. (c) In the event that the Officer's liability for the excise tax under section 4999 of the Code for a taxable year is subsequently determined to be different than the amount with respect to which the Tax Indemnity Payment is made, the Officer or the Company, as the case may be, shall pay to the other party at the time that the amount of such excise tax is finally determined, an appropriate amount, plus interest, such that the payment made pursuant to Sections 7(a) or 7(b), when increased by the amount of the payment made to the Officer pursuant to this Section 7(c), or when reduced by the amount of the payment made to the Company pursuant to this Section 7(c), equals the amount that should have properly been paid to the Officer under Section 7(a). The interest paid to the Company under this Section 7(c) shall be determined at the rate provided under section 1274(b)(2)(B) of the Code. The payment made to the Officer shall include such amount of interest as is necessary to satisfy any interest assessment made by the Internal Revenue Service and an additional amount equal to any monetary penalties assessed by the Internal Revenue Service on account of an underpayment of the excise tax. To confirm that the proper Page -12- amount, if any, was paid to the Officer under this Section 7, the Officer shall furnish to the Company a copy of each tax return which reflects a liability for an excise tax, at least 20 days before the date on which such return is required to be filed with the Internal Revenue Service. Nothing in this Agreement shall give the Company any right to control or otherwise participate in any action, suit or proceeding to which the Officer is a party as a result of positions taken on the Officer's federal income tax return with respect to the Officer's liability for excise taxes under section 4999 of the Code. Section 8. Indemnification upon and following a Change of Control. (a) From and after the effective date of a Change of Control through the sixth anniversary of such effective date, the Bank and the Company agree to indemnify and hold harmless the Officer, against any costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities (collectively, "Costs") incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of matters existing or occurring at or prior to the time the Change of Control became effective whether asserted or claimed prior to, at or after the effective date of the Change of Control, and to advance any such Costs to the Officer as they are from time to time incurred, in each case to the fullest extent the Officer would have been indemnified as a director or officer of the Bank or the Company, as applicable, and as then permitted under applicable law. (b) The Officer, seeking to claim indemnification under Section 8(a) of this Agreement and upon learning of any such claim, action, suit, proceeding or investigation, shall promptly notify the Bank thereof, but the failure to so notify shall not relieve the Bank or the Company of any liability it may have pursuant to this Agreement to the Officer if such failure does not materially and substantially prejudice the Bank or the Company. In the event of any such claim, action, suit, proceeding or investigation, (i) the Bank and the Company shall have the right to assume the defense thereof with counsel reasonably acceptable to the Officer, and the Bank and the Company shall not be liable to the Officer for any legal expenses of other counsel subsequently incurred by the Officer in connection with the defense thereof, except that if the Bank and the Company do not elect to assume such defense within a reasonable time or counsel for the Officer at any time advises that there are issues which raise conflicts of interest between the Bank or the Company and the Officer (and counsel for the Bank or the Company does not disagree), the Officer may retain counsel satisfactory to the Officer, and the Bank and the Company shall remain responsible for the reasonable fees and expenses of such counsel as set forth above, to be paid promptly as statements therefor are received; provided, however, that the Bank and the Company shall be obligated pursuant to this paragraph (b)(i) to pay for only one firm of counsel for all indemnified parties in any one jurisdiction with respect to any given claim, action, suit, proceeding or Page -13- investigation unless the use of one counsel for such indemnified parties, including the Officer, would present such counsel with a conflict of interest; (ii) the Officer will reasonably cooperate in the defense of any such matter; and (iii) the Bank and the Company shall not be liable for any settlement effected by the Officer without their prior written consent, which shall not be unreasonably withheld. Section 9. Resignation. (a) The Officer may resign from the Officer's employment with the Bank at any time. A resignation under this Section 9 shall be effected by notice of resignation given by the Officer to the Bank and shall take effect on the later of the effective date of termination specified in such notice or the date on which the notice of termination is deemed given by the Officer. For purposes of this Agreement, retirement of the Officer from the employment of the Bank or the Company under circumstances defined as "normal retirement" or "early retirement" pursuant to any qualified defined benefit or qualified defined contribution pension plan maintained by the Bank shall be deemed a resignation by the Officer's of the Officer's employment with the Bank. A resignation by the Officer as described in Section 5(a)(ii) of this Agreement, for purposes of this Agreement shall be deemed to be termination with "Cause". The Officer's resignation of any of the positions within the Bank or the Company to which he has been assigned shall be deemed a resignation from all such positions. (b) The Officer's resignation shall be deemed to be for "Good Reason" if the effective date of resignation occurs during the Term, but on or after the effective date of a Pending Change of Control or Change of Control, and is on account of: (i) the failure of the Bank (whether by act or omission of the Board of Directors, or otherwise) to appoint, re-appoint, elect or re-elect the Officer to the office and position with the Bank that he held immediately prior to the Change of Control or Pending Change of Control (the "Assigned Office") or to a more senior office and position; (ii) if the Officer is or becomes a member of the Board of Directors of the Bank, the failure of the shareholders of the Bank (whether in an election in which the Officer stands as a nominee or in an election where the Officer is not a nominee), to elect or re-elect the Officer to such directorship at the expiration of the Officer's term as a director, unless such failure is a result of the Officer's refusal to stand for election; (iii) a material failure by the Bank, whether by amendment of the charter or organization, by-laws, action of the Board of Directors of the Bank or otherwise, to vest in the Officer the functions, duties, or responsibilities customarily associated with the Assigned Office; provided that the Officer Page -14- shall have given notice of such failure to the Bank, and the Bank has not fully cured such failure within thirty (30) days after such notice is deemed given; (iv) any reduction of the Officer's rate of base salary in effect from time to time, whether or not material, or any failure, other than due to reasonable administrative error that is fully cured within 5 days after notice of such administrative error is deemed given, to pay any portion of the Officer's compensation as and when due; (v) any change in the terms and conditions of any compensation or benefit program in which the Officer participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of the Officer's total compensation package; provided that the Officer shall have given notice of such material adverse effect to the Bank, and the Bank has not fully cured such failure within thirty (30) days after such notice is deemed given; (vi) any material breach by the Company or the Bank of any material term, condition or covenant contained in this Agreement; provided that the Officer shall have given notice to the Company and the Bank of such material adverse effect, and the Company or the Bank have not fully cured such failure within thirty (30) days after such notice is deemed given; or (vii) a change in the Officer's principal place of employment to a location that is outside of Nassau County or Queens County, New York. In all other cases, a resignation by the Officer shall be deemed to be without Good Reason. In the event of resignation, the Officer shall state in the Officer's notice of resignation whether the Officer considers his or her resignation to be a resignation with Good Reason, and if he does, he shall state in such notice the grounds which constitute Good Reason. The Officer's determination of the existence of Good Reason shall be conclusive in the absence of fraud, bad faith or manifest error. (c) In the event of the Officer's resignation for any reason, the Bank shall pay and deliver the Standard Termination Entitlements. In the event of the Officer's resignation with Good Reason and such resignation is effective within six (6) months of the effective date of the Change of Control (the "Resignation Window Period"), the Bank shall also pay and deliver the Additional Termination Entitlements. In the event the Officer's resignation with Good Reason is based upon Section 9(b)(iii),(iv),(v) or (vi) and the notice required by such provision has been given within six months of the effective date of the Change of Control but the applicable cure period will not expire until on or after the date which is six months following the effective date of the Change of Control, the Resignation Window Period shall be extended so as expire 30 days following the expiration of the applicable cure period. Page -15- Section 10. Terms and Conditions of the Additional Termination Entitlements. The Bank and the Officer hereby stipulate that the damages which may be incurred by the Officer following any termination of employment are not capable of accurate measurement as of the date first above written and that the Additional Termination Entitlements constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Officer's efforts, if any, to mitigate damages. The Bank and the Officer further agree that the Bank may condition the payment and delivery of the Additional Termination Entitlements on the receipt of: (a) the Officer's resignation from any and all positions which he holds as an officer, director or committee member with respect to the Bank or any subsidiary or affiliate of the Bank; and (b) a release of the Bank and the Company and their officers, directors, shareholders, subsidiaries and affiliates, in form and substance satisfactory to the Bank, of any liability to the Officer, whether for compensation or damages, in connection with the Officer's employment with the Bank and the termination of such employment, except for the Standard Termination Entitlements, the Additional Termination Entitlements, the Tax Indemnity Payment and indemnification payments due the Officer pursuant to Section 8 or Section 16 of this Agreement. To the extent the Bank conditions the payment and delivery of the Additional Termination Entitlements or any other amount due under this Agreement upon the receipt of the release provided in Section 10(b) of this Agreement and such release by law may not be effective until the expiration of a required prior notice and/or a recission period following its execution by the Officer, then any payment required to be made pursuant to this Agreement may be deferred until the expiration of the period which is the sum of the period within which such payment was required to be made under the terms of this Agreement but for this Section 10 and the period of any required prior notice and recission periods, provided, however, that the Bank shall pay to the Officer for each day of such deferral interest in addition to any other amounts due and owing under this Agreement at the rate of the federal short term rate established under section 1274 of the Code for the month in which the Officer's termination of employment occurs calculated on the basis of a 360 day year for the actual number of days of such deferral on the amount so deferred. Section 11. Confidentiality. Unless the Officer obtains the prior written consent of the Bank or the Company, the Officer shall keep confidential and shall refrain from using for the benefit of himself or herself, or any person or entity other than the Company or any entity which is a subsidiary of the Company or of which the Company is a subsidiary, any material document or information obtained from the Company, or from its parent or subsidiaries, in the course of the Officer's employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of the Officer) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this Section 11 shall Page -16- prevent the Officer, with or without the Company's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. Section 12. No Effect on Employee Benefit Plans or Programs. Except to the extent specifically provided herein, the termination of the Officer's employment during the Assurance Period or thereafter, whether by the Bank or by the Officer, shall have no effect on the rights and obligations of the parties hereto under the Bank's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Bank from time to time; provided, however, that nothing in this Agreement shall be deemed to duplicate any compensation or benefits provided under any severance agreement, plan or program covering the Officer to which the Bank or Company is a party and any duplicative amount payable under any such agreement, plan or program shall be applied as an offset to reduce the amounts otherwise payable hereunder. The Additional Termination Entitlements provided hereunder, when due and payable or provided to the Officer, or in the case of the Officer's death, to his or her estate, surviving dependants or designated beneficiaries, as applicable, are acknowledged to be in lieu of any benefits that would otherwise be provided under such circumstances pursuant to the Bank's Severance Pay Plan, as amended, or Severance Compensation Plan, as amended. Section 13. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Officer, the Officer's legal representatives and testate or intestate distributees, and the Company and the Bank and their respective successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Company or the Bank may be sold or otherwise transferred. Failure of the Company to obtain from any successor its express written assumption of the Company's or Bank's obligations hereunder at least 60 days in advance of the scheduled effective date of any such succession shall, if such succession constitutes a Change of Control, constitute Good Reason for the Officer's resignation on or at any time during the Term following the occurrence of such succession. Section 14. No Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. Section 15. Notices. Any communication required or permitted to be given under this Agreement, including any Page -17- notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Officer: Anthony S. DiCostanzo 3 Beechwood Court Dix Hills, New York 11746 If to the Company or the Bank: Astoria Financial Corporation One Astoria Federal Plaza Lake Success, New York 11042 Attention: Chairman, President and Chief Executive Officer with a copy to: Thacher Proffitt & Wood Two World Financial Center New York, New York 10281 Attention: W. Edward Bright, Esq. Section 16. Indemnification for Attorneys' Fees. (a) The Bank shall indemnify, hold harmless and defend the Officer against reasonable costs, including legal fees, incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved, as a result of the Officer's efforts, in good faith, to defend or enforce the terms of this Agreement; provided, however, that the Officer shall have substantially prevailed on the merits pursuant to a judgment, decree or order of a court of competent jurisdiction or of an arbitrator in an arbitration proceeding, or in a settlement.. For purposes of this Agreement, any settlement agreement which provides for payment of any amounts in settlement of the Bank's obligations under this Agreement shall be conclusive evidence of the Officer's entitlement to indemnification under this Agreement, and any such indemnification payments shall be in addition to amounts payable pursuant to such settlement agreement, unless such settlement agreement expressly provides otherwise. (b) The Bank's or the Company's obligation to make the payments provided for in this Agreement and otherwise to perform their respective obligations under this Page -18- Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Bank or the Company may have against the Officer or others. In no event shall the Officer be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Officer under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Officer obtains other employment. Unless it is determined that the Officer has acted frivolously or in bad faith, the Bank shall pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Officer may reasonably incur as a result of or in connection with the Officer's consultation with legal counsel or arising out of any action, suit, proceeding, tax controversy, appeal or contest (regardless of the outcome thereof) by the Bank, the Company, the Officer or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Officer about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in section 7872(f)(2)(A) of the Code. Section 17. Employment Rights and Funding Obligations. (a) Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Bank, the Company or the Officer to have the Officer continue as an officer of the Bank or the Company or to remain in the employment of the Bank, the Company. (b) Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Bank, the Company or the Officer to create a trust of any kind to fund any benefits which may be payable pursuant to this Agreement, and to the extent that the Officer acquires a right to receive benefits from the Bank or the Company pursuant to this Agreement, such right shall be no greater than the right of any unsecured general creditor of the Bank or the Company, respectively. Section 18. Withholding. The Bank or the Company, as applicable, shall have the right to deduct and withhold from any amounts paid in cash pursuant to this Agreement by the Bank or the Company, respectively, any taxes or other amounts required by law to be withheld with respect to such payment. Section 19. Compliance with Section 409A of the Code. In the event that this Agreement is construed to be a non-qualified deferred compensation plan described in section 409A of the Code, The Agreement shall be operated, administered and construed so as to conform to the requirements of section 409A. Section 20. Severability. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. Page -19- Section 21. Survival. The rights and obligations of the Bank, the Company and the Officer under this Agreement, unless otherwise expressly provided in this Agreement, shall survive the expiration of the term or other termination of this Agreement. Section 22. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. Section 23. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. Section 24. Governing Law. Except to the extent preempted by federal law, this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to contracts entered into and to be performed entirely within the State of New York. Section 25. Headings and Construction. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. Section 26. Entire Agreement; Modifications. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. Section 27. Required Regulatory Provisions. The following provisions are included for the purposes of complying with various laws, rules and regulations applicable to the Bank: (a) Notwithstanding anything herein contained to the contrary, in no event shall the aggregate amount of compensation payable to the Officer on account of the Officer's termination of employment exceed three times the Officer's average annual total Page -20- compensation for the last five consecutive calendar years to end prior to the Officer's termination of employment with the Bank (or for the Officer's entire period of employment with the Bank if less than five calendar years). (b) Notwithstanding anything herein contained to the contrary, any payments to the Officer by the Bank, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. Section 1828(k), and any regulations promulgated thereunder. (c) Notwithstanding anything herein contained to the contrary, if the Officer is suspended from office and/or temporarily prohibited from participating in the conduct of the affairs of the Bank pursuant to a notice served under section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C. Section 1818(e)(3) or 1818(g)(1), the Bank's obligations under this Agreement shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in such notice are dismissed, the Bank, in its discretion, may (i) pay to the Officer all or part of the compensation withheld while the Bank's obligations hereunder were suspended and (ii) reinstate, in whole or in part, any of the obligations which were suspended. (d) Notwithstanding anything herein contained to the contrary, if the Officer is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under section 8(e)(4) or 8(g)(1) of the FDI Act, 12 U.S.C. Section 1818(e)(4) or (g)(1), all prospective obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights and obligations of the Bank and the Officer shall not be affected. (e) Notwithstanding anything herein contained to the contrary, if the Bank is in default (within the meaning of section 3(x)(1) of the FDI Act, 12 U.S.C. Section 1813(x)(1), all prospective obligations of the Bank under this Agreement shall terminate as of the date of default, but vested rights and obligations of the Bank and the Officer shall not be affected. (f) Notwithstanding anything herein contained to the contrary, all prospective obligations of the Bank hereunder shall be terminated, except to the extent that a continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Director of the Office of Thrift Supervision ("OTS") or his designee or the Federal Deposit Insurance Corporation ("FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in section 13(c) of the FDI Act, 12 U.S.C. Section 1823(c); (ii) by the Director of the OTS or his designee at the time such Director or designee approves a supervisory merger to resolve problems related to the operation of the Bank or when the Bank is determined by such Director to be in an unsafe or unsound condition. The vested rights and obligations of the parties shall not be affected. If and to the extent that any of the foregoing provisions shall cease to be required or by applicable law, rule or regulation, the same shall become inoperative as though eliminated by formal Page -21- amendment of this Agreement. None of the foregoing provisions, other than Section 27(b) shall limit any obligations of the Company under this Agreement. Section 28. Guaranty. The Company hereby irrevocably and unconditionally guarantees to the Officer the payment of all amounts, and the performance of all other obligations, due from the Bank in accordance with the terms of this Agreement as and when due without any requirement of presentment, demand of payment, protest or notice of dishonor or nonpayment. Solely for purposes of determining the extent of the Company's guarantee, the obligations of the Bank under this Agreement shall be determined as though Section 27(a), (c), (d), (e) and (f) did not apply to the Bank. IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to be executed and the Officer has hereunto set the Officer's hand, all as of the day and year first above written. /S/ Anthony S. DiCostanzo --------------------------------- ANTHONY S. DICOSTANZO Attest: ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION By: /S/ Alan P. Eggleston By: /S/ George L. Engelke, Jr. ------------------------------------- ----------------------------- Name: Alan P. Eggleston Name: George L. Engelke, Jr. Title: Executive Vice President, Secretary Title: Chairman, President and General Counsel and Chief Executive Officer Attest: ASTORIA FINANCIAL CORPORATION By: /S/ Alan P. Eggleston By: /S/ George L. Engelke, Jr. ------------------------------------- ----------------------------- Name: Alan P. Eggleston Name: George L. Engelke, Jr. Title: Executive Vice President, Secretary Title: Chairman, President and General Counsel and Chief Executive Officer Page -22- EX-10 8 ex10-40.txt EXHIBIT 10.40 Exhibit 10.40 CHANGE OF CONTROL SEVERANCE AGREEMENT This CHANGE OF CONTROL SEVERANCE AGREEMENT (the "Agreement") is made and entered into as of December 21, 2005 by and among ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION, a savings and loan association organized and existing under the laws of the United States of America and having an office at One Astoria Federal Plaza, Lake Success, New York 11042 (the "Bank"), ASTORIA FINANCIAL CORPORATION, a business corporation organized and existing under the laws of the State of Delaware and having an office at One Astoria Federal Plaza, Lake Success, New York 11042 (the "Company") and Thomas E. Lavery, an individual residing at 18 Polly Drive, Huntington, New York 11743 (the "Officer"). INTRODUCTORY STATEMENT WHEREAS, the Boards of Directors of the Bank and the Company have approved the Bank and the Company entering into Change of Control Severance Agreements with certain key officers of the Bank, WHEREAS, the Officer is a key officer of the Bank; WHEREAS, should the possibility of a Pending Change of Control or Change of Control of the Bank or the Company arise, the Boards of Directors of the Bank and the Company believe it is imperative that the Bank, the Company and the Boards of Directors of the Bank and the Company should be able to rely upon the Officer to continue in his or her position, and that the Bank and the Company should be able to receive and rely upon the Officer's advice, if requested, as to the best interests of the Bank and the Company and their respective shareholders without concern that the Officer might be distracted by the personal uncertainties and risks created by the possibility of a Pending Change of Control or Change of Control; WHEREAS, should the possibility of a Pending Change of Control or Change of Control arise, in addition to his or her regular duties, the Officer may be called upon to assist in the assessment of such possible Pending Change of Control or Change of Control, advise management and the Board as to whether such Pending Change of Control or Change of Control would be in the best interests of the Bank, the Company and their respective shareholders, and to take such other actions as the Boards of Directors of the Bank and the Company might determine to be appropriate; and NOW, THEREFORE, to assure the Bank and the Company that they will have the continued dedication of the Officer and the availability of his or her advice and counsel notwithstanding the possibility, threat, or occurrence of a Pending Change of Control or Change of Control of the Bank or the Company, and to induce the Officer to remain in the employ of the Bank, in consideration of Page -1- the mutual premises and agreements set forth herein and for other good and valuable consideration, the Bank, the Company and the Officer agree as follows: AGREEMENT Section 1. Effective Date; Term; Pending Change of Control and Change of Control Defined. (a) This Agreement shall take effect on December 21, 2005 (the "Effective Date") and shall remain in effect during the period (the "Term") beginning on the Effective Date and ending on the earlier of: (i) the date, prior to the occurrence of a Pending Change of Control or a Change of Control, as defined below, respectively, on which the Officer's employment by the Bank terminates whether by discharge, resignation, death, disability or retirement, or (ii) the later of: (A) the first anniversary of the date on which the Bank notifies the Executive of its intent to discontinue the Agreement (the "Initial Expiration Date") or, (B) the second anniversary of the latest Change of Control, as defined below, that occurs after the Effective Date and before the Initial Expiration Date. (b) For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: (i) the consummation of a reorganization, merger or consolidation of the Company with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and Page -2- (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; (ii) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert; (iii) a complete liquidation or dissolution of the Company; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board of Directors of the Company do not belong to any of the following groups: (A) individuals who were members of the Board of Directors of the Company on the Effective Date of this Agreement; or (B) individuals who first became members of the Board of Directors of the Company after the Effective Date of this Agreement either: (1) upon election to serve as a member of the Board of Directors of the Company by affirmative vote of three-quarters of the members of such Board, or of a nominating committee thereof, in office at the time of such first election; or (2) upon election by the shareholders of the Board of Directors of the Company to serve as a member of such Board, but only if nominated for election by affirmative vote of three-quarters of the members of the Board of Directors of the Company, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A Page -3- promulgated under the Exchange Act) other than by or on behalf of the Board of Directors of the Company; or (v) any event which would be described in Section 1(b)(i), (ii), (iii) or (iv) if the term "Bank" were substituted for the term "Company" therein. In no event, however, shall a Change of Control be deemed to have occurred as a result of any acquisition of securities or assets of the Company, the Bank, or a subsidiary of either of them, by the Company, the Bank, or any subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this Section 1(b), the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. (c) For purposes of this Agreement, a "Pending Change of Control" shall mean: (i) the approval by the shareholders of the Bank or the Company of a definitive agreement for a transaction which, if consummated, would result in a Change of Control; or (ii) the approval by the shareholders of the Bank or the Company of a transaction which, if consummated, would result in a Change of Control. Section 2. Discharge Prior to a Pending Change of Control. The Bank may discharge the Officer at any time prior to the occurrence of a Pending Change of Control or, if no Pending Change of Control has occurred, a Change of Control, for any reason or for no reason. In such event: (a) The Bank shall pay to the Officer or the Officer's estate his or her earned but unpaid compensation, including, without limitation, salary and all other items which constitute wages under applicable law, as of the date of the Officer's termination of employment. This payment shall be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than 30 days after the date of the Officer's termination of employment. (b) The Bank shall provide the benefits due, if any, to the Officer or the Officer's estate, surviving dependents or designated beneficiaries, as applicable, under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the officers and employees of the Bank. The time and manner of payment or other delivery of these benefits and the recipients of such benefits shall be determined according to the terms and conditions of the applicable plans and programs. Page -4- The payments and benefits described in Sections 2(a) and (b) shall be referred to in this Agreement as the "Standard Termination Entitlements." Section 3. Termination of Employment Due to Death. The Officer's employment with the Bank shall terminate automatically, and without any further action on the part of any party to this Agreement, on the date of the Officer's death. In such event, the Bank shall pay and deliver to the Officer's estate and surviving dependents and designated beneficiaries, as applicable, the Standard Termination Entitlements. Section 4. Termination Due to Disability after a Pending Change of Control or a Change of Control. The Bank may terminate the Officer's employment during the Term and after the occurrence of a Pending Change of Control or a Change of Control upon a determination by the Board of Directors of the Bank, by the affirmative vote of 75% of its entire membership, acting in reliance on the written advice of a medical professional acceptable to it, that the Officer is suffering from a physical or mental impairment which, at the date of the determination, has prevented the Officer from performing the Officer's assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year ending with the date of the determination or is likely to result in death or prevent the Officer from performing the Officer's assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year beginning with the date of the determination. In such event: (a) The Bank shall pay and deliver the Standard Termination Entitlements to the Officer or, in the event of the Officer's death following such termination but before payment, to the Officer's estate, surviving dependents or designated beneficiaries, as applicable. (b) In addition to the Standard Termination Entitlements, the Bank shall continue to pay the Officer his or her base salary, at the annual rate in effect for the Officer immediately prior to the termination of the Officer's employment, during a period ending on the earliest of: (i) the expiration of one hundred and eighty (180) days after the date of termination of the Officer's employment; (ii) the date on which long-term disability insurance benefits are first payable to the Officer under any long-term disability insurance plan covering employees of the Bank; or (iii) the date of the Officer's death. A termination of employment due to disability under this Section 4 shall be effected by a notice of termination given to the Officer by the Bank and shall take effect on the later of the effective date of termination specified in such notice or, if no such date is specified, the date on which the notice of termination is deemed given to the Officer. Page -5- Section 5. Discharge with Cause after a Pending Change of Control or Change of Control. (a) The Bank may terminate the Officer's employment with "Cause" during the Term and after the occurrence of a Pending Change of Control or a Change of Control, but a termination shall be deemed to have occurred with "Cause" only if: (i) (A) the Board of Directors of the Bank, by the affirmative vote of 75% of its entire membership, determines that the Officer is guilty of personal dishonesty, incompetence, wilful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, wilful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, or any material breach of this Agreement, in each case measured against standards generally prevailing at the relevant time in the savings and community banking industry; (B) prior to the vote contemplated by Section 5(a)(i)(A), the Board of Directors of the Bank shall provide the Officer with notice of the Bank's intent to discharge the Officer for Cause, detailing with particularity the facts and circumstances which are alleged to constitute Cause (the "Notice of Intent to Discharge"); and (C) after the giving of the Notice of Intent to Discharge and before the taking of the vote contemplated by Section 5(a)(i)(A), the Officer, together with the Officer's legal counsel, if he so desires, are afforded a reasonable opportunity to make both written and oral presentations before the Board of Directors of the Bank for the purpose of refuting the alleged grounds for Cause for the Officer's discharge; and (D) after the vote contemplated by Section 5(a)(i)(A), the Bank has furnished to the Officer a notice of termination which shall specify the effective date of the Officer's termination of employment (which shall in no event be earlier than the date on which such notice is deemed given) and include a copy of a resolution or resolutions adopted by the Board of Directors of the Bank, certified by its corporate secretary, authorizing the termination of the Officer's employment with Cause and stating with particularity the facts and circumstances found to constitute Cause for the Officer's discharge (the "Final Discharge Notice"); or (ii) the Officer, during the 90 day period commencing on the delivery to the Officer by the Bank of the Notice of Intent to Discharge specified in Section 5(a)(i)(B), resigns his or her employment with the Bank prior to the delivery to the Officer by the Bank of the Final Discharge Notice specified in Section 5(a)(i)(D). Page -6- For purposes of this Section 5, no act or failure to act, on the part of the Officer, shall be considered "willful" unless it is done, or omitted to be done, by the Officer in bad faith or without reasonable belief that the Officer's action or omission was in the best interests of the Bank or the Company, respectively. Any act or failure to act based upon authority given pursuant to a resolution duly adopted by the Board of Directors of the Bank or the Company or based upon the written advice of counsel for the Bank or the Company shall be conclusively presumed to be done or omitted to be done by the Officer in good faith and in the best interests of the Bank or the Company, respectively. (b) If the Officer is discharged with Cause during the Term and after a Pending Change of Control or a Change of Control, the Bank shall pay and provide to him or, in the event of the Officer's death following such discharge but prior to payment and providing, to the Officer's estate, surviving dependents or designated beneficiaries, as applicable, the Standard Termination Entitlements only. (c) Following the giving of a Notice of Intent to Discharge, the Bank may temporarily suspend the Officer's duties and authority and, in such event, may also suspend the payment of salary and other cash compensation, but not the Officer's participation in retirement, insurance and other employee benefit plans. If the Officer is not discharged or is discharged without Cause within forty-five (45) days after the giving of a Notice of Intent to Discharge, payments of salary and cash compensation shall resume, and all payments withheld during the period of suspension shall be promptly restored. If the Officer is discharged with Cause not later than forty-five (45) days after the giving of the Notice of Intent to Discharge, all payments withheld during the period of suspension shall be deemed forfeited and shall not be included in the Standard Termination Entitlements. If a Final Discharge Notice is given later than forty-five (45) days, but sooner than ninety (90) days, after the giving of the Notice of Intent to Discharge, all payments made to the Officer during the period beginning with the giving of the Notice of Intent to Discharge and ending with the Officer's discharge with Cause shall be retained by the Officer and shall not be applied to offset the Standard Termination Entitlements. If the Bank does not give a Final Discharge Notice to the Officer within ninety (90) days after giving a Notice of Intent to Discharge, the Notice of Intent to Discharge shall be deemed withdrawn and any future action to discharge the Officer with Cause shall require the giving of a new Notice of Intent to Discharge. If the Officer resigns pursuant to Section 5(a)(ii), the Officer shall forfeit his or her right to suspended amounts that have not been restored as of the date of the Officer's resignation or notice of resignation, whichever is earlier. Section 6. Discharge Without Cause after a Pending Change of Control or Change of Control. The Bank may discharge the Officer without Cause at any time after the occurrence of a Pending Change of Control or a Change of Control, and in such event: Page -7- (a) The Bank shall pay and deliver the Standard Termination Entitlements to the Officer or, in the event of the Officer's death following the Officer's discharge but before payment, to the Officer's estate, surviving dependents or designated beneficiaries, as applicable. (b) In addition to the Standard Termination Entitlements: (i) the Bank shall provide for a period of two years following the date of the Officer's discharge (the "Assurance Period") for the benefit of the Officer and the Officer's spouse and dependents continued group life, health (including hospitalization, medical and major medical), dental, accident and long-term disability insurance benefits on substantially the same terms and conditions (including any co-payments and deductibles, but excluding any premium sharing arrangements, it being the intention of the parties to this Agreement that the premiums for such insurance benefits shall be the sole cost and expense of the Bank) in effect for them immediately prior to the Officer's discharge. The coverage provided under this Section 6(b)(i) may, at the election of the Bank, be secondary to the coverage provided as part of the Standard Termination Entitlements and to any employer-paid coverage provided by a subsequent employer or through Medicare, with the result that benefits under the other coverages will offset the coverage required by this Section 6(b)(i), provided, however, that for purposes of this Section 6(b)(i) benefits provided at the cost of the Officer or the Officer's spouse or dependants pursuant to the Comprehensive Omnibus Budget Reconciliation Act, as amended, shall not be considered Standard Termination Entitlements. (ii) The Bank shall make a lump sum payment to the Officer or, in the event of the Officer's death following the Officer's discharge but before payment, to the Officer's estate in an amount equal to the salary that the Officer would have earned if he had continued working for the Bank during the Assurance Period at the highest annual rate of salary achieved during the period of three (3) years ending immediately prior to the date of termination (the "Salary Severance Payment"). The Salary Severance Payment shall be computed using the following formula: SSP = BS x NY where: "SSP" is the amount of the Salary Severance Payment, before the deduction of applicable federal, state and local withholding taxes; "BS" is the highest annual rate of salary achieved by the Officer during the period of three (3) years ending immediately prior to the date of termination; and "NY" is the Assurance Period expressed as a number of years (rounded, if such period is not a whole number, to the next highest whole number). Page -8- The Salary Severance Payment shall be made within thirty (30) days after the Officer's termination of employment and shall be in lieu of any claim to a continuation of base salary which the Officer might otherwise have and in lieu of cash severance benefits under any severance benefits program which may be in effect for officers or employees of the Bank. (iii) The Bank shall make a lump sum payment to the Officer or, in the event of the Officer's death following the Officer's discharge but before payment, to the Officer's estate in an amount equal to the potential annual bonuses that the Officer would have earned if the Officer had continued working for the Bank during the Assurance Period at the highest annual rate of salary achieved during the period of three (3) years ending immediately prior to the date of termination (the "Bonus Severance Payment"). The Bonus Severance Payment shall be computed using the following formula: BSP = ((BS x TIO x IP) + ( BS x TIO x FP x AP)) x NY where: "BSP" is the amount of the Bonus Severance Payment, before the deduction of applicable federal, state and local withholding taxes; "BS" is the highest annual rate of salary achieved by the Officer during the period of three (3) years ending immediately prior to the date of termination; "TIO" is the target incentive opportunity for the Officer expressed as a percentage as established by the Compensation Committee of the Board of Directors of the Bank pursuant to the Bank's Annual Incentive Plan for Select Executives for the year in which the employment of the Officer by the Bank terminates or, if no target incentive opportunity is established by the Compensation Committee of the Board of Directors of the Bank for such year with respect to the Officer, then the highest target incentive opportunity established by the Compensation Committee of the Board of Directors of the Bank for the Officer pursuant to the Annual Incentive Plan for Select Executives during the period of three (3) years ending immediately prior to the date of termination; "IP" is either (i) the percentage of the TIO which is to be determined by the individual performance of the Officer as established by the Compensation Committee of the Board of Directors of the Bank pursuant to the Bank's Annual Incentive Plan for Select Executives for the year in which the employment of the Officer by the Bank terminates or, (ii) if no target incentive opportunity has been established with respect to the Officer by the Compensation Committee of the Board of Directors of the Bank for the year in which the employment of the Officer by the Bank terminates, then the lowest percentage of the target incentive opportunity to be determined by the Page -9- individual performance of the Officer established by the Compensation Committee of the Board of Directors of the Bank for the Officer pursuant to the Annual Incentive Plan for Select Executives during the period of three (3) years ending immediately prior to the date of termination; "FP" is either (i) the percentage of the TIO with respect to the Officer which is to be determined by the financial performance of the Company as established by the Compensation Committee of the Board of Directors of the Bank pursuant to the Bank's Annual Incentive Plan for Select Executives for the year in which the employment of the Officer by the Bank terminates or, (ii) if no target incentive opportunity has been established with respect to the Officer by the Compensation Committee of the Board of Directors of the Bank for the year in which the employment of the Officer by the Bank terminates, then a percentage equal to 100% minus the IP; "AP" is the highest award percentage available to the Officer with respect to the financial performance of the Company as established by the Compensation Committee of the Board of Directors of the Bank pursuant to the Bank's Annual Incentive Plan for Select Executives for the year in which the employment of the Officer by the Bank terminates or, (ii) if no target incentive opportunity has been established with respect to the Officer by the Compensation Committee of the Board of Directors of the Bank for the year in which the employment of the Officer by the Bank terminates, then the highest award percentage available to the Officer with respect to the financial performance of the Company established by the Compensation Committee of the Board of Directors of the Bank for the Officer pursuant to the Annual Incentive Plan for Select Executives during the period of three (3) years ending immediately prior to the date of termination; "NY" is the Assurance Period expressed as a number of years (rounded, if such period is not a whole number, to the next highest whole number). The Bonus Severance Payment shall be made within thirty (30) days after the Officer's termination of employment and shall be in lieu of any claim to a continuation of participation in annual bonus plans of the Bank which the Officer might otherwise have. The payments and benefits described in Section 6(b) are referred to in this Agreement as the "Additional Termination Entitlements". The payments described in Section 6(b)(ii) and (iii) shall be computed at the expense of the Company by an attorney of the firm of Thacher Proffitt & Wood, Two World Financial Center, New York, New York 10281or, if such firm is unavailable or unwilling to perform such calculation, by a firm of independent certified public accountants selected by the Officer and reasonably satisfactory to the Company (the "Computation Advisor"). The determination of the Computation Advisor as to the amount of such payments shall be final and binding in the absence of manifest error. Page -10- Section 7. Tax Indemnification. (a) If the Officer's employment terminates under circumstances entitling the Officer or, in the event of the Officer's death following such termination but before payment, his or her estate to the Additional Termination Entitlements, the Company shall pay to the Officer or, in the event of the Officer's death, his or her estate an additional amount (the "Tax Indemnity Payment") intended to indemnify the Officer against the financial effects of the excise tax imposed on excess parachute payments under section 28OG of the Internal Revenue Code of 1986, as amended, (the "Code"). The Tax Indemnity Payment shall be determined under the following formula: E x P TIP = --------------------------------------- 1 - (( FI x ( 1 - SLI )) + SLI + E + M ) where: "TIP" is the Tax Indemnity Payment, before the deduction of applicable federal, state and local withholding taxes; "E" is the percentage rate at which an excise tax is assessed under section 4999 of the Code; "P" is the amount with respect to which such excise tax is assessed, determined without regard to this Section 16; "FI" is the highest marginal rate of income tax applicable to the Officer under the Code for the taxable year in question; "SLI" is the sum of the highest marginal rates of income tax applicable to the Officer under all applicable state and local laws for the taxable year in question; and "M" is the highest marginal rate of Medicare tax applicable to the Officer under the Code for the taxable year in question. Such computation shall be made at the expense of the Company by the Computation Advisor and shall be based on the following assumptions: (i) that a change in ownership, a change in effective ownership or control or a change in the ownership of a substantial portion of the assets of the Bank or the Company has occurred within the meaning of section 28OG of the Code (a "28OG Change of Control"); (ii) that all direct or indirect payments made to or benefits conferred upon the Officer on account of the Officer's termination of employment are "parachute payments" within the meaning of section 28OG of the Code; and Page -11- (iii) that no portion of such payments is reasonable compensation for services rendered prior to the Officer's termination of employment. (b) With respect to any payment that is presumed to be a parachute payment for purposes of section 28OG of the Code, the Tax Indemnity Payment shall be made to the Officer on the earlier of the date the Company, the Bank or any direct or indirect subsidiary or affiliate of the Company or the Bank is required to withhold such tax or the date the tax is required to be paid by the Officer, unless, prior to such date, the Company delivers to the Officer the written opinion (the "Opinion Letter"), in form and substance reasonably satisfactory to the Officer, of the Computation Advisor or, if the Computation Advisor is unable to provide such opinion, of an attorney or firm of independent certified public accountants selected by the Company and reasonably satisfactory to the Officer, to the effect that the Officer has a reasonable basis on which to conclude that: (i) no 28OG Change in Control has occurred, or (ii) all or part of the payment or benefit in question is not a parachute payment for purposes of section 28OG of the Code, or (iii) all or a part of such payment or benefit constitutes reasonable compensation for services rendered prior to the 28OG Change of Control, or (iv) for some other reason which shall be set forth in detail in such letter, no excise tax is due under section 4999 of the Code with respect to such payment or benefit. If the Company delivers an Opinion Letter, the Computation Advisor shall re-compute, and the Company shall make, the Tax Indemnity Payment in reliance on the information contained in the Opinion Letter. (c) In the event that the Officer's liability for the excise tax under section 4999 of the Code for a taxable year is subsequently determined to be different than the amount with respect to which the Tax Indemnity Payment is made, the Officer or the Company, as the case may be, shall pay to the other party at the time that the amount of such excise tax is finally determined, an appropriate amount, plus interest, such that the payment made pursuant to Sections 7(a) or 7(b), when increased by the amount of the payment made to the Officer pursuant to this Section 7(c), or when reduced by the amount of the payment made to the Company pursuant to this Section 7(c), equals the amount that should have properly been paid to the Officer under Section 7(a). The interest paid to the Company under this Section 7(c) shall be determined at the rate provided under section 1274(b)(2)(B) of the Code. The payment made to the Officer shall include such amount of interest as is necessary to satisfy any interest assessment made by the Internal Revenue Service and an additional amount equal to any monetary penalties assessed by the Internal Revenue Service on account of an underpayment of the excise tax. To confirm that the proper Page -12- amount, if any, was paid to the Officer under this Section 7, the Officer shall furnish to the Company a copy of each tax return which reflects a liability for an excise tax, at least 20 days before the date on which such return is required to be filed with the Internal Revenue Service. Nothing in this Agreement shall give the Company any right to control or otherwise participate in any action, suit or proceeding to which the Officer is a party as a result of positions taken on the Officer's federal income tax return with respect to the Officer's liability for excise taxes under section 4999 of the Code. Section 8. Indemnification upon and following a Change of Control. (a) From and after the effective date of a Change of Control through the sixth anniversary of such effective date, the Bank and the Company agree to indemnify and hold harmless the Officer, against any costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities (collectively, "Costs") incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of matters existing or occurring at or prior to the time the Change of Control became effective whether asserted or claimed prior to, at or after the effective date of the Change of Control, and to advance any such Costs to the Officer as they are from time to time incurred, in each case to the fullest extent the Officer would have been indemnified as a director or officer of the Bank or the Company, as applicable, and as then permitted under applicable law. (b) The Officer, seeking to claim indemnification under Section 8(a) of this Agreement and upon learning of any such claim, action, suit, proceeding or investigation, shall promptly notify the Bank thereof, but the failure to so notify shall not relieve the Bank or the Company of any liability it may have pursuant to this Agreement to the Officer if such failure does not materially and substantially prejudice the Bank or the Company. In the event of any such claim, action, suit, proceeding or investigation, (i) the Bank and the Company shall have the right to assume the defense thereof with counsel reasonably acceptable to the Officer, and the Bank and the Company shall not be liable to the Officer for any legal expenses of other counsel subsequently incurred by the Officer in connection with the defense thereof, except that if the Bank and the Company do not elect to assume such defense within a reasonable time or counsel for the Officer at any time advises that there are issues which raise conflicts of interest between the Bank or the Company and the Officer (and counsel for the Bank or the Company does not disagree), the Officer may retain counsel satisfactory to the Officer, and the Bank and the Company shall remain responsible for the reasonable fees and expenses of such counsel as set forth above, to be paid promptly as statements therefor are received; provided, however, that the Bank and the Company shall be obligated pursuant to this paragraph (b)(i) to pay for only one firm of counsel for all indemnified parties in any one jurisdiction with respect to any given claim, action, suit, proceeding or Page -13- investigation unless the use of one counsel for such indemnified parties, including the Officer, would present such counsel with a conflict of interest; (ii) the Officer will reasonably cooperate in the defense of any such matter; and (iii) the Bank and the Company shall not be liable for any settlement effected by the Officer without their prior written consent, which shall not be unreasonably withheld. Section 9. Resignation. (a) The Officer may resign from the Officer's employment with the Bank at any time. A resignation under this Section 9 shall be effected by notice of resignation given by the Officer to the Bank and shall take effect on the later of the effective date of termination specified in such notice or the date on which the notice of termination is deemed given by the Officer. For purposes of this Agreement, retirement of the Officer from the employment of the Bank or the Company under circumstances defined as "normal retirement" or "early retirement" pursuant to any qualified defined benefit or qualified defined contribution pension plan maintained by the Bank shall be deemed a resignation by the Officer's of the Officer's employment with the Bank. A resignation by the Officer as described in Section 5(a)(ii) of this Agreement, for purposes of this Agreement shall be deemed to be termination with "Cause". The Officer's resignation of any of the positions within the Bank or the Company to which he has been assigned shall be deemed a resignation from all such positions. (b) The Officer's resignation shall be deemed to be for "Good Reason" if the effective date of resignation occurs during the Term, but on or after the effective date of a Pending Change of Control or Change of Control, and is on account of: (i) the failure of the Bank (whether by act or omission of the Board of Directors, or otherwise) to appoint, re-appoint, elect or re-elect the Officer to the office and position with the Bank that he held immediately prior to the Change of Control or Pending Change of Control (the "Assigned Office") or to a more senior office and position; (ii) if the Officer is or becomes a member of the Board of Directors of the Bank, the failure of the shareholders of the Bank (whether in an election in which the Officer stands as a nominee or in an election where the Officer is not a nominee), to elect or re-elect the Officer to such directorship at the expiration of the Officer's term as a director, unless such failure is a result of the Officer's refusal to stand for election; (iii) a material failure by the Bank, whether by amendment of the charter or organization, by-laws, action of the Board of Directors of the Bank or otherwise, to vest in the Officer the functions, duties, or responsibilities customarily associated with the Assigned Office; provided that the Officer Page -14- shall have given notice of such failure to the Bank, and the Bank has not fully cured such failure within thirty (30) days after such notice is deemed given; (iv) any reduction of the Officer's rate of base salary in effect from time to time, whether or not material, or any failure, other than due to reasonable administrative error that is fully cured within 5 days after notice of such administrative error is deemed given, to pay any portion of the Officer's compensation as and when due; (v) any change in the terms and conditions of any compensation or benefit program in which the Officer participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of the Officer's total compensation package; provided that the Officer shall have given notice of such material adverse effect to the Bank, and the Bank has not fully cured such failure within thirty (30) days after such notice is deemed given; (vi) any material breach by the Company or the Bank of any material term, condition or covenant contained in this Agreement; provided that the Officer shall have given notice to the Company and the Bank of such material adverse effect, and the Company or the Bank have not fully cured such failure within thirty (30) days after such notice is deemed given; or (vii) a change in the Officer's principal place of employment to a location that is outside of Nassau County or Queens County, New York. In all other cases, a resignation by the Officer shall be deemed to be without Good Reason. In the event of resignation, the Officer shall state in the Officer's notice of resignation whether the Officer considers his or her resignation to be a resignation with Good Reason, and if he does, he shall state in such notice the grounds which constitute Good Reason. The Officer's determination of the existence of Good Reason shall be conclusive in the absence of fraud, bad faith or manifest error. (c) In the event of the Officer's resignation for any reason, the Bank shall pay and deliver the Standard Termination Entitlements. In the event of the Officer's resignation with Good Reason and such resignation is effective within six (6) months of the effective date of the Change of Control (the "Resignation Window Period"), the Bank shall also pay and deliver the Additional Termination Entitlements. In the event the Officer's resignation with Good Reason is based upon Section 9(b)(iii),(iv),(v) or (vi) and the notice required by such provision has been given within six months of the effective date of the Change of Control but the applicable cure period will not expire until on or after the date which is six months following the effective date of the Change of Control, the Resignation Window Period shall be extended so as expire 30 days following the expiration of the applicable cure period. Page -15- Section 10. Terms and Conditions of the Additional Termination Entitlements. The Bank and the Officer hereby stipulate that the damages which may be incurred by the Officer following any termination of employment are not capable of accurate measurement as of the date first above written and that the Additional Termination Entitlements constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Officer's efforts, if any, to mitigate damages. The Bank and the Officer further agree that the Bank may condition the payment and delivery of the Additional Termination Entitlements on the receipt of: (a) the Officer's resignation from any and all positions which he holds as an officer, director or committee member with respect to the Bank or any subsidiary or affiliate of the Bank; and (b) a release of the Bank and the Company and their officers, directors, shareholders, subsidiaries and affiliates, in form and substance satisfactory to the Bank, of any liability to the Officer, whether for compensation or damages, in connection with the Officer's employment with the Bank and the termination of such employment, except for the Standard Termination Entitlements, the Additional Termination Entitlements, the Tax Indemnity Payment and indemnification payments due the Officer pursuant to Section 8 or Section 16 of this Agreement. To the extent the Bank conditions the payment and delivery of the Additional Termination Entitlements or any other amount due under this Agreement upon the receipt of the release provided in Section 10(b) of this Agreement and such release by law may not be effective until the expiration of a required prior notice and/or a recission period following its execution by the Officer, then any payment required to be made pursuant to this Agreement may be deferred until the expiration of the period which is the sum of the period within which such payment was required to be made under the terms of this Agreement but for this Section 10 and the period of any required prior notice and recission periods, provided, however, that the Bank shall pay to the Officer for each day of such deferral interest in addition to any other amounts due and owing under this Agreement at the rate of the federal short term rate established under section 1274 of the Code for the month in which the Officer's termination of employment occurs calculated on the basis of a 360 day year for the actual number of days of such deferral on the amount so deferred. Section 11. Confidentiality. Unless the Officer obtains the prior written consent of the Bank or the Company, the Officer shall keep confidential and shall refrain from using for the benefit of himself or herself, or any person or entity other than the Company or any entity which is a subsidiary of the Company or of which the Company is a subsidiary, any material document or information obtained from the Company, or from its parent or subsidiaries, in the course of the Officer's employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of the Officer) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this Section 11 shall Page -16- prevent the Officer, with or without the Company's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. Section 12. No Effect on Employee Benefit Plans or Programs. Except to the extent specifically provided herein, the termination of the Officer's employment during the Assurance Period or thereafter, whether by the Bank or by the Officer, shall have no effect on the rights and obligations of the parties hereto under the Bank's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Bank from time to time; provided, however, that nothing in this Agreement shall be deemed to duplicate any compensation or benefits provided under any severance agreement, plan or program covering the Officer to which the Bank or Company is a party and any duplicative amount payable under any such agreement, plan or program shall be applied as an offset to reduce the amounts otherwise payable hereunder. The Additional Termination Entitlements provided hereunder, when due and payable or provided to the Officer, or in the case of the Officer's death, to his or her estate, surviving dependants or designated beneficiaries, as applicable, are acknowledged to be in lieu of any benefits that would otherwise be provided under such circumstances pursuant to the Bank's Severance Pay Plan, as amended, or Severance Compensation Plan, as amended. Section 13. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Officer, the Officer's legal representatives and testate or intestate distributees, and the Company and the Bank and their respective successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Company or the Bank may be sold or otherwise transferred. Failure of the Company to obtain from any successor its express written assumption of the Company's or Bank's obligations hereunder at least 60 days in advance of the scheduled effective date of any such succession shall, if such succession constitutes a Change of Control, constitute Good Reason for the Officer's resignation on or at any time during the Term following the occurrence of such succession. Section 14. No Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. Section 15. Notices. Any communication required or permitted to be given under this Agreement, including any Page -17- notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Officer: Thomas E. Lavery 18 Polly Drive Huntington, New York 11743 If to the Company or the Bank: Astoria Financial Corporation One Astoria Federal Plaza Lake Success, New York 11042 Attention: Chairman, President and Chief Executive Officer with a copy to: Thacher Proffitt & Wood Two World Financial Center New York, New York 10281 Attention: W. Edward Bright, Esq. Section 16. Indemnification for Attorneys' Fees. (a) The Bank shall indemnify, hold harmless and defend the Officer against reasonable costs, including legal fees, incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved, as a result of the Officer's efforts, in good faith, to defend or enforce the terms of this Agreement; provided, however, that the Officer shall have substantially prevailed on the merits pursuant to a judgment, decree or order of a court of competent jurisdiction or of an arbitrator in an arbitration proceeding, or in a settlement.. For purposes of this Agreement, any settlement agreement which provides for payment of any amounts in settlement of the Bank's obligations under this Agreement shall be conclusive evidence of the Officer's entitlement to indemnification under this Agreement, and any such indemnification payments shall be in addition to amounts payable pursuant to such settlement agreement, unless such settlement agreement expressly provides otherwise. (b) The Bank's or the Company's obligation to make the payments provided for in this Agreement and otherwise to perform their respective obligations under this Page -18- Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Bank or the Company may have against the Officer or others. In no event shall the Officer be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Officer under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Officer obtains other employment. Unless it is determined that the Officer has acted frivolously or in bad faith, the Bank shall pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Officer may reasonably incur as a result of or in connection with the Officer's consultation with legal counsel or arising out of any action, suit, proceeding, tax controversy, appeal or contest (regardless of the outcome thereof) by the Bank, the Company, the Officer or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Officer about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in section 7872(f)(2)(A) of the Code. Section 17. Employment Rights and Funding Obligations. (a) Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Bank, the Company or the Officer to have the Officer continue as an officer of the Bank or the Company or to remain in the employment of the Bank, the Company. (b) Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Bank, the Company or the Officer to create a trust of any kind to fund any benefits which may be payable pursuant to this Agreement, and to the extent that the Officer acquires a right to receive benefits from the Bank or the Company pursuant to this Agreement, such right shall be no greater than the right of any unsecured general creditor of the Bank or the Company, respectively. Section 18. Withholding. The Bank or the Company, as applicable, shall have the right to deduct and withhold from any amounts paid in cash pursuant to this Agreement by the Bank or the Company, respectively, any taxes or other amounts required by law to be withheld with respect to such payment. Section 19. Compliance with Section 409A of the Code. In the event that this Agreement is construed to be a non-qualified deferred compensation plan described in section 409A of the Code, The Agreement shall be operated, administered and construed so as to conform to the requirements of section 409A. Section 20. Severability. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. Page -19- Section 21. Survival. The rights and obligations of the Bank, the Company and the Officer under this Agreement, unless otherwise expressly provided in this Agreement, shall survive the expiration of the term or other termination of this Agreement. Section 22. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. Section 23. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. Section 24. Governing Law. Except to the extent preempted by federal law, this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to contracts entered into and to be performed entirely within the State of New York. Section 25. Headings and Construction. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. Section 26. Entire Agreement; Modifications. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. Section 27. Required Regulatory Provisions. The following provisions are included for the purposes of complying with various laws, rules and regulations applicable to the Bank: (a) Notwithstanding anything herein contained to the contrary, in no event shall the aggregate amount of compensation payable to the Officer on account of the Officer's termination of employment exceed three times the Officer's average annual total Page -20- compensation for the last five consecutive calendar years to end prior to the Officer's termination of employment with the Bank (or for the Officer's entire period of employment with the Bank if less than five calendar years). (b) Notwithstanding anything herein contained to the contrary, any payments to the Officer by the Bank, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. Section 1828(k), and any regulations promulgated thereunder. (c) Notwithstanding anything herein contained to the contrary, if the Officer is suspended from office and/or temporarily prohibited from participating in the conduct of the affairs of the Bank pursuant to a notice served under section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C. Section 1818(e)(3) or 1818(g)(1), the Bank's obligations under this Agreement shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in such notice are dismissed, the Bank, in its discretion, may (i) pay to the Officer all or part of the compensation withheld while the Bank's obligations hereunder were suspended and (ii) reinstate, in whole or in part, any of the obligations which were suspended. (d) Notwithstanding anything herein contained to the contrary, if the Officer is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under section 8(e)(4) or 8(g)(1) of the FDI Act, 12 U.S.C. Section 1818(e)(4) or (g)(1), all prospective obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights and obligations of the Bank and the Officer shall not be affected. (e) Notwithstanding anything herein contained to the contrary, if the Bank is in default (within the meaning of section 3(x)(1) of the FDI Act, 12 U.S.C. Section 1813(x)(1), all prospective obligations of the Bank under this Agreement shall terminate as of the date of default, but vested rights and obligations of the Bank and the Officer shall not be affected. (f) Notwithstanding anything herein contained to the contrary, all prospective obligations of the Bank hereunder shall be terminated, except to the extent that a continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Director of the Office of Thrift Supervision ("OTS") or his designee or the Federal Deposit Insurance Corporation ("FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in section 13(c) of the FDI Act, 12 U.S.C. Section 1823(c); (ii) by the Director of the OTS or his designee at the time such Director or designee approves a supervisory merger to resolve problems related to the operation of the Bank or when the Bank is determined by such Director to be in an unsafe or unsound condition. The vested rights and obligations of the parties shall not be affected. If and to the extent that any of the foregoing provisions shall cease to be required or by applicable law, rule or regulation, the same shall become inoperative as though eliminated by formal Page -21- amendment of this Agreement. None of the foregoing provisions, other than Section 27(b) shall limit any obligations of the Company under this Agreement. Section 28. Guaranty. The Company hereby irrevocably and unconditionally guarantees to the Officer the payment of all amounts, and the performance of all other obligations, due from the Bank in accordance with the terms of this Agreement as and when due without any requirement of presentment, demand of payment, protest or notice of dishonor or nonpayment. Solely for purposes of determining the extent of the Company's guarantee, the obligations of the Bank under this Agreement shall be determined as though Section 27(a), (c), (d), (e) and (f) did not apply to the Bank. IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to be executed and the Officer has hereunto set the Officer's hand, all as of the day and year first above written. /S/ Thomas E. Lavery ----------------------------------- THOMAS E. LAVERY Attest: ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION By: /S/ Alan P. Eggleston By: /S/ George L. Engelke, Jr. ----------------------------------- ------------------------------- Name: Alan P. Eggleston Name: George L. Engelke, Jr. Title: Executive Vice President, Secretary Title: Chairman, President and and General Counsel Chief Executive Officer Attest: ASTORIA FINANCIAL CORPORATION By: /S/ Alan P. Eggleston By: /S/ George L. Engelke, Jr. ----------------------------------- ------------------------------- Name: Alan P. Eggleston Name: George L. Engelke, Jr. Title: Executive Vice President, Secretary Title: Chairman, President and and General Counsel Chief Executive Officer Page -22- EX-10 9 ex10-41.txt EXHIBIT 10.41 Exhibit 10.41 CHANGE OF CONTROL SEVERANCE AGREEMENT This CHANGE OF CONTROL SEVERANCE AGREEMENT (the "Agreement") is made and entered into as of December 21, 2005 by and among ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION, a savings and loan association organized and existing under the laws of the United States of America and having an office at One Astoria Federal Plaza, Lake Success, New York 11042 (the "Bank"), ASTORIA FINANCIAL CORPORATION, a business corporation organized and existing under the laws of the State of Delaware and having an office at One Astoria Federal Plaza, Lake Success, New York 11042 (the "Company") and William J. Mannix, an individual residing at 3 Sean Michael Court, Farmingdale, New York 11735 (the "Officer"). INTRODUCTORY STATEMENT WHEREAS, the Boards of Directors of the Bank and the Company have approved the Bank and the Company entering into Change of Control Severance Agreements with certain key officers of the Bank, WHEREAS, the Officer is a key officer of the Bank; WHEREAS, should the possibility of a Pending Change of Control or Change of Control of the Bank or the Company arise, the Boards of Directors of the Bank and the Company believe it is imperative that the Bank, the Company and the Boards of Directors of the Bank and the Company should be able to rely upon the Officer to continue in his or her position, and that the Bank and the Company should be able to receive and rely upon the Officer's advice, if requested, as to the best interests of the Bank and the Company and their respective shareholders without concern that the Officer might be distracted by the personal uncertainties and risks created by the possibility of a Pending Change of Control or Change of Control; WHEREAS, should the possibility of a Pending Change of Control or Change of Control arise, in addition to his or her regular duties, the Officer may be called upon to assist in the assessment of such possible Pending Change of Control or Change of Control, advise management and the Board as to whether such Pending Change of Control or Change of Control would be in the best interests of the Bank, the Company and their respective shareholders, and to take such other actions as the Boards of Directors of the Bank and the Company might determine to be appropriate; and NOW, THEREFORE, to assure the Bank and the Company that they will have the continued dedication of the Officer and the availability of his or her advice and counsel notwithstanding the possibility, threat, or occurrence of a Pending Change of Control or Change of Control of the Bank or the Company, and to induce the Officer to remain in the employ of the Bank, in consideration of Page -1- the mutual premises and agreements set forth herein and for other good and valuable consideration, the Bank, the Company and the Officer agree as follows: AGREEMENT Section 1. Effective Date; Term; Pending Change of Control and Change of Control Defined. (a) This Agreement shall take effect on December 21, 2005 (the "Effective Date") and shall remain in effect during the period (the "Term") beginning on the Effective Date and ending on the earlier of: (i) the date, prior to the occurrence of a Pending Change of Control or a Change of Control, as defined below, respectively, on which the Officer's employment by the Bank terminates whether by discharge, resignation, death, disability or retirement, or (ii) the later of: (A) the first anniversary of the date on which the Bank notifies the Executive of its intent to discontinue the Agreement (the "Initial Expiration Date") or, (B) the second anniversary of the latest Change of Control, as defined below, that occurs after the Effective Date and before the Initial Expiration Date. (b) For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: (i) the consummation of a reorganization, merger or consolidation of the Company with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and Page -2- (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; (ii) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert; (iii) a complete liquidation or dissolution of the Company; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board of Directors of the Company do not belong to any of the following groups: (A) individuals who were members of the Board of Directors of the Company on the Effective Date of this Agreement; or (B) individuals who first became members of the Board of Directors of the Company after the Effective Date of this Agreement either: (1) upon election to serve as a member of the Board of Directors of the Company by affirmative vote of three-quarters of the members of such Board, or of a nominating committee thereof, in office at the time of such first election; or (2) upon election by the shareholders of the Board of Directors of the Company to serve as a member of such Board, but only if nominated for election by affirmative vote of three-quarters of the members of the Board of Directors of the Company, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A Page -3- promulgated under the Exchange Act) other than by or on behalf of the Board of Directors of the Company; or (v) any event which would be described in Section 1(b)(i), (ii), (iii) or (iv) if the term "Bank" were substituted for the term "Company" therein. In no event, however, shall a Change of Control be deemed to have occurred as a result of any acquisition of securities or assets of the Company, the Bank, or a subsidiary of either of them, by the Company, the Bank, or any subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this Section 1(b), the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. (c) For purposes of this Agreement, a "Pending Change of Control" shall mean: (i) the approval by the shareholders of the Bank or the Company of a definitive agreement for a transaction which, if consummated, would result in a Change of Control; or (ii) the approval by the shareholders of the Bank or the Company of a transaction which, if consummated, would result in a Change of Control. Section 2. Discharge Prior to a Pending Change of Control. The Bank may discharge the Officer at any time prior to the occurrence of a Pending Change of Control or, if no Pending Change of Control has occurred, a Change of Control, for any reason or for no reason. In such event: (a) The Bank shall pay to the Officer or the Officer's estate his or her earned but unpaid compensation, including, without limitation, salary and all other items which constitute wages under applicable law, as of the date of the Officer's termination of employment. This payment shall be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than 30 days after the date of the Officer's termination of employment. (b) The Bank shall provide the benefits due, if any, to the Officer or the Officer's estate, surviving dependents or designated beneficiaries, as applicable, under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the officers and employees of the Bank. The time and manner of payment or other delivery of these benefits and the recipients of such benefits shall be determined according to the terms and conditions of the applicable plans and programs. Page -4- The payments and benefits described in Sections 2(a) and (b) shall be referred to in this Agreement as the "Standard Termination Entitlements." Section 3. Termination of Employment Due to Death. The Officer's employment with the Bank shall terminate automatically, and without any further action on the part of any party to this Agreement, on the date of the Officer's death. In such event, the Bank shall pay and deliver to the Officer's estate and surviving dependents and designated beneficiaries, as applicable, the Standard Termination Entitlements. Section 4. Termination Due to Disability after a Pending Change of Control or a Change of Control. The Bank may terminate the Officer's employment during the Term and after the occurrence of a Pending Change of Control or a Change of Control upon a determination by the Board of Directors of the Bank, by the affirmative vote of 75% of its entire membership, acting in reliance on the written advice of a medical professional acceptable to it, that the Officer is suffering from a physical or mental impairment which, at the date of the determination, has prevented the Officer from performing the Officer's assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year ending with the date of the determination or is likely to result in death or prevent the Officer from performing the Officer's assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year beginning with the date of the determination. In such event: (a) The Bank shall pay and deliver the Standard Termination Entitlements to the Officer or, in the event of the Officer's death following such termination but before payment, to the Officer's estate, surviving dependents or designated beneficiaries, as applicable. (b) In addition to the Standard Termination Entitlements, the Bank shall continue to pay the Officer his or her base salary, at the annual rate in effect for the Officer immediately prior to the termination of the Officer's employment, during a period ending on the earliest of: (i) the expiration of one hundred and eighty (180) days after the date of termination of the Officer's employment; (ii) the date on which long-term disability insurance benefits are first payable to the Officer under any long-term disability insurance plan covering employees of the Bank; or (iii) the date of the Officer's death. A termination of employment due to disability under this Section 4 shall be effected by a notice of termination given to the Officer by the Bank and shall take effect on the later of the effective date of termination specified in such notice or, if no such date is specified, the date on which the notice of termination is deemed given to the Officer. Page -5- Section 5. Discharge with Cause after a Pending Change of Control or Change of Control. (a) The Bank may terminate the Officer's employment with "Cause" during the Term and after the occurrence of a Pending Change of Control or a Change of Control, but a termination shall be deemed to have occurred with "Cause" only if: (i) (A) the Board of Directors of the Bank, by the affirmative vote of 75% of its entire membership, determines that the Officer is guilty of personal dishonesty, incompetence, wilful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, wilful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, or any material breach of this Agreement, in each case measured against standards generally prevailing at the relevant time in the savings and community banking industry; (B) prior to the vote contemplated by Section 5(a)(i)(A), the Board of Directors of the Bank shall provide the Officer with notice of the Bank's intent to discharge the Officer for Cause, detailing with particularity the facts and circumstances which are alleged to constitute Cause (the "Notice of Intent to Discharge"); and (C) after the giving of the Notice of Intent to Discharge and before the taking of the vote contemplated by Section 5(a)(i)(A), the Officer, together with the Officer's legal counsel, if he so desires, are afforded a reasonable opportunity to make both written and oral presentations before the Board of Directors of the Bank for the purpose of refuting the alleged grounds for Cause for the Officer's discharge; and (D) after the vote contemplated by Section 5(a)(i)(A), the Bank has furnished to the Officer a notice of termination which shall specify the effective date of the Officer's termination of employment (which shall in no event be earlier than the date on which such notice is deemed given) and include a copy of a resolution or resolutions adopted by the Board of Directors of the Bank, certified by its corporate secretary, authorizing the termination of the Officer's employment with Cause and stating with particularity the facts and circumstances found to constitute Cause for the Officer's discharge (the "Final Discharge Notice"); or (ii) the Officer, during the 90 day period commencing on the delivery to the Officer by the Bank of the Notice of Intent to Discharge specified in Section 5(a)(i)(B), resigns his or her employment with the Bank prior to the delivery to the Officer by the Bank of the Final Discharge Notice specified in Section 5(a)(i)(D). Page -6- For purposes of this Section 5, no act or failure to act, on the part of the Officer, shall be considered "willful" unless it is done, or omitted to be done, by the Officer in bad faith or without reasonable belief that the Officer's action or omission was in the best interests of the Bank or the Company, respectively. Any act or failure to act based upon authority given pursuant to a resolution duly adopted by the Board of Directors of the Bank or the Company or based upon the written advice of counsel for the Bank or the Company shall be conclusively presumed to be done or omitted to be done by the Officer in good faith and in the best interests of the Bank or the Company, respectively. (b) If the Officer is discharged with Cause during the Term and after a Pending Change of Control or a Change of Control, the Bank shall pay and provide to him or, in the event of the Officer's death following such discharge but prior to payment and providing, to the Officer's estate, surviving dependents or designated beneficiaries, as applicable, the Standard Termination Entitlements only. (c) Following the giving of a Notice of Intent to Discharge, the Bank may temporarily suspend the Officer's duties and authority and, in such event, may also suspend the payment of salary and other cash compensation, but not the Officer's participation in retirement, insurance and other employee benefit plans. If the Officer is not discharged or is discharged without Cause within forty-five (45) days after the giving of a Notice of Intent to Discharge, payments of salary and cash compensation shall resume, and all payments withheld during the period of suspension shall be promptly restored. If the Officer is discharged with Cause not later than forty-five (45) days after the giving of the Notice of Intent to Discharge, all payments withheld during the period of suspension shall be deemed forfeited and shall not be included in the Standard Termination Entitlements. If a Final Discharge Notice is given later than forty-five (45) days, but sooner than ninety (90) days, after the giving of the Notice of Intent to Discharge, all payments made to the Officer during the period beginning with the giving of the Notice of Intent to Discharge and ending with the Officer's discharge with Cause shall be retained by the Officer and shall not be applied to offset the Standard Termination Entitlements. If the Bank does not give a Final Discharge Notice to the Officer within ninety (90) days after giving a Notice of Intent to Discharge, the Notice of Intent to Discharge shall be deemed withdrawn and any future action to discharge the Officer with Cause shall require the giving of a new Notice of Intent to Discharge. If the Officer resigns pursuant to Section 5(a)(ii), the Officer shall forfeit his or her right to suspended amounts that have not been restored as of the date of the Officer's resignation or notice of resignation, whichever is earlier. Section 6. Discharge Without Cause after a Pending Change of Control or Change of Control. The Bank may discharge the Officer without Cause at any time after the occurrence of a Pending Change of Control or a Change of Control, and in such event: Page -7- (a) The Bank shall pay and deliver the Standard Termination Entitlements to the Officer or, in the event of the Officer's death following the Officer's discharge but before payment, to the Officer's estate, surviving dependents or designated beneficiaries, as applicable. (b) In addition to the Standard Termination Entitlements: (i) the Bank shall provide for a period of two years following the date of the Officer's discharge (the "Assurance Period") for the benefit of the Officer and the Officer's spouse and dependents continued group life, health (including hospitalization, medical and major medical), dental, accident and long-term disability insurance benefits on substantially the same terms and conditions (including any co-payments and deductibles, but excluding any premium sharing arrangements, it being the intention of the parties to this Agreement that the premiums for such insurance benefits shall be the sole cost and expense of the Bank) in effect for them immediately prior to the Officer's discharge. The coverage provided under this Section 6(b)(i) may, at the election of the Bank, be secondary to the coverage provided as part of the Standard Termination Entitlements and to any employer-paid coverage provided by a subsequent employer or through Medicare, with the result that benefits under the other coverages will offset the coverage required by this Section 6(b)(i), provided, however, that for purposes of this Section 6(b)(i) benefits provided at the cost of the Officer or the Officer's spouse or dependants pursuant to the Comprehensive Omnibus Budget Reconciliation Act, as amended, shall not be considered Standard Termination Entitlements. (ii) The Bank shall make a lump sum payment to the Officer or, in the event of the Officer's death following the Officer's discharge but before payment, to the Officer's estate in an amount equal to the salary that the Officer would have earned if he had continued working for the Bank during the Assurance Period at the highest annual rate of salary achieved during the period of three (3) years ending immediately prior to the date of termination (the "Salary Severance Payment"). The Salary Severance Payment shall be computed using the following formula: SSP = BS x NY where: "SSP" is the amount of the Salary Severance Payment, before the deduction of applicable federal, state and local withholding taxes; "BS" is the highest annual rate of salary achieved by the Officer during the period of three (3) years ending immediately prior to the date of termination; and "NY" is the Assurance Period expressed as a number of years (rounded, if such period is not a whole number, to the next highest whole number). Page -8- The Salary Severance Payment shall be made within thirty (30) days after the Officer's termination of employment and shall be in lieu of any claim to a continuation of base salary which the Officer might otherwise have and in lieu of cash severance benefits under any severance benefits program which may be in effect for officers or employees of the Bank. (iii) The Bank shall make a lump sum payment to the Officer or, in the event of the Officer's death following the Officer's discharge but before payment, to the Officer's estate in an amount equal to the potential annual bonuses that the Officer would have earned if the Officer had continued working for the Bank during the Assurance Period at the highest annual rate of salary achieved during the period of three (3) years ending immediately prior to the date of termination (the "Bonus Severance Payment"). The Bonus Severance Payment shall be computed using the following formula: BSP = ((BS x TIO x IP) + ( BS x TIO x FP x AP)) x NY where: "BSP" is the amount of the Bonus Severance Payment, before the deduction of applicable federal, state and local withholding taxes; "BS" is the highest annual rate of salary achieved by the Officer during the period of three (3) years ending immediately prior to the date of termination; "TIO" is the target incentive opportunity for the Officer expressed as a percentage as established by the Compensation Committee of the Board of Directors of the Bank pursuant to the Bank's Annual Incentive Plan for Select Executives for the year in which the employment of the Officer by the Bank terminates or, if no target incentive opportunity is established by the Compensation Committee of the Board of Directors of the Bank for such year with respect to the Officer, then the highest target incentive opportunity established by the Compensation Committee of the Board of Directors of the Bank for the Officer pursuant to the Annual Incentive Plan for Select Executives during the period of three (3) years ending immediately prior to the date of termination; "IP" is either (i) the percentage of the TIO which is to be determined by the individual performance of the Officer as established by the Compensation Committee of the Board of Directors of the Bank pursuant to the Bank's Annual Incentive Plan for Select Executives for the year in which the employment of the Officer by the Bank terminates or, (ii) if no target incentive opportunity has been established with respect to the Officer by the Compensation Committee of the Board of Directors of the Bank for the year in which the employment of the Officer by the Bank terminates, then the lowest percentage of the target incentive opportunity to be determined by the Page -9- individual performance of the Officer established by the Compensation Committee of the Board of Directors of the Bank for the Officer pursuant to the Annual Incentive Plan for Select Executives during the period of three (3) years ending immediately prior to the date of termination; "FP" is either (i) the percentage of the TIO with respect to the Officer which is to be determined by the financial performance of the Company as established by the Compensation Committee of the Board of Directors of the Bank pursuant to the Bank's Annual Incentive Plan for Select Executives for the year in which the employment of the Officer by the Bank terminates or, (ii) if no target incentive opportunity has been established with respect to the Officer by the Compensation Committee of the Board of Directors of the Bank for the year in which the employment of the Officer by the Bank terminates, then a percentage equal to 100% minus the IP; "AP" is the highest award percentage available to the Officer with respect to the financial performance of the Company as established by the Compensation Committee of the Board of Directors of the Bank pursuant to the Bank's Annual Incentive Plan for Select Executives for the year in which the employment of the Officer by the Bank terminates or, (ii) if no target incentive opportunity has been established with respect to the Officer by the Compensation Committee of the Board of Directors of the Bank for the year in which the employment of the Officer by the Bank terminates, then the highest award percentage available to the Officer with respect to the financial performance of the Company established by the Compensation Committee of the Board of Directors of the Bank for the Officer pursuant to the Annual Incentive Plan for Select Executives during the period of three (3) years ending immediately prior to the date of termination; "NY" is the Assurance Period expressed as a number of years (rounded, if such period is not a whole number, to the next highest whole number). The Bonus Severance Payment shall be made within thirty (30) days after the Officer's termination of employment and shall be in lieu of any claim to a continuation of participation in annual bonus plans of the Bank which the Officer might otherwise have. The payments and benefits described in Section 6(b) are referred to in this Agreement as the "Additional Termination Entitlements". The payments described in Section 6(b)(ii) and (iii) shall be computed at the expense of the Company by an attorney of the firm of Thacher Proffitt & Wood, Two World Financial Center, New York, New York 10281or, if such firm is unavailable or unwilling to perform such calculation, by a firm of independent certified public accountants selected by the Officer and reasonably satisfactory to the Company (the "Computation Advisor"). The determination of the Computation Advisor as to the amount of such payments shall be final and binding in the absence of manifest error. Page -10- Section 7. Tax Indemnification. (a) If the Officer's employment terminates under circumstances entitling the Officer or, in the event of the Officer's death following such termination but before payment, his or her estate to the Additional Termination Entitlements, the Company shall pay to the Officer or, in the event of the Officer's death, his or her estate an additional amount (the "Tax Indemnity Payment") intended to indemnify the Officer against the financial effects of the excise tax imposed on excess parachute payments under section 28OG of the Internal Revenue Code of 1986, as amended, (the "Code"). The Tax Indemnity Payment shall be determined under the following formula: E x P TIP = ---------------------------------------- 1 - (( FI x ( 1 - SLI )) + SLI + E + M ) where: "TIP" is the Tax Indemnity Payment, before the deduction of applicable federal, state and local withholding taxes; "E" is the percentage rate at which an excise tax is assessed under section 4999 of the Code; "P" is the amount with respect to which such excise tax is assessed, determined without regard to this Section 16; "FI" is the highest marginal rate of income tax applicable to the Officer under the Code for the taxable year in question; "SLI" is the sum of the highest marginal rates of income tax applicable to the Officer under all applicable state and local laws for the taxable year in question; and "M" is the highest marginal rate of Medicare tax applicable to the Officer under the Code for the taxable year in question. Such computation shall be made at the expense of the Company by the Computation Advisor and shall be based on the following assumptions: (i) that a change in ownership, a change in effective ownership or control or a change in the ownership of a substantial portion of the assets of the Bank or the Company has occurred within the meaning of section 28OG of the Code (a "28OG Change of Control"); (ii) that all direct or indirect payments made to or benefits conferred upon the Officer on account of the Officer's termination of employment are "parachute payments" within the meaning of section 28OG of the Code; and Page -11- (iii) that no portion of such payments is reasonable compensation for services rendered prior to the Officer's termination of employment. (b) With respect to any payment that is presumed to be a parachute payment for purposes of section 28OG of the Code, the Tax Indemnity Payment shall be made to the Officer on the earlier of the date the Company, the Bank or any direct or indirect subsidiary or affiliate of the Company or the Bank is required to withhold such tax or the date the tax is required to be paid by the Officer, unless, prior to such date, the Company delivers to the Officer the written opinion (the "Opinion Letter"), in form and substance reasonably satisfactory to the Officer, of the Computation Advisor or, if the Computation Advisor is unable to provide such opinion, of an attorney or firm of independent certified public accountants selected by the Company and reasonably satisfactory to the Officer, to the effect that the Officer has a reasonable basis on which to conclude that: (i) no 28OG Change in Control has occurred, or (ii) all or part of the payment or benefit in question is not a parachute payment for purposes of section 28OG of the Code, or (iii) all or a part of such payment or benefit constitutes reasonable compensation for services rendered prior to the 28OG Change of Control, or (iv) for some other reason which shall be set forth in detail in such letter, no excise tax is due under section 4999 of the Code with respect to such payment or benefit. If the Company delivers an Opinion Letter, the Computation Advisor shall re-compute, and the Company shall make, the Tax Indemnity Payment in reliance on the information contained in the Opinion Letter. (c) In the event that the Officer's liability for the excise tax under section 4999 of the Code for a taxable year is subsequently determined to be different than the amount with respect to which the Tax Indemnity Payment is made, the Officer or the Company, as the case may be, shall pay to the other party at the time that the amount of such excise tax is finally determined, an appropriate amount, plus interest, such that the payment made pursuant to Sections 7(a) or 7(b), when increased by the amount of the payment made to the Officer pursuant to this Section 7(c), or when reduced by the amount of the payment made to the Company pursuant to this Section 7(c), equals the amount that should have properly been paid to the Officer under Section 7(a). The interest paid to the Company under this Section 7(c) shall be determined at the rate provided under section 1274(b)(2)(B) of the Code. The payment made to the Officer shall include such amount of interest as is necessary to satisfy any interest assessment made by the Internal Revenue Service and an additional amount equal to any monetary penalties assessed by the Internal Revenue Service on account of an underpayment of the excise tax. To confirm that the proper Page -12- amount, if any, was paid to the Officer under this Section 7, the Officer shall furnish to the Company a copy of each tax return which reflects a liability for an excise tax, at least 20 days before the date on which such return is required to be filed with the Internal Revenue Service. Nothing in this Agreement shall give the Company any right to control or otherwise participate in any action, suit or proceeding to which the Officer is a party as a result of positions taken on the Officer's federal income tax return with respect to the Officer's liability for excise taxes under section 4999 of the Code. Section 8. Indemnification upon and following a Change of Control. (a) From and after the effective date of a Change of Control through the sixth anniversary of such effective date, the Bank and the Company agree to indemnify and hold harmless the Officer, against any costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities (collectively, "Costs") incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of matters existing or occurring at or prior to the time the Change of Control became effective whether asserted or claimed prior to, at or after the effective date of the Change of Control, and to advance any such Costs to the Officer as they are from time to time incurred, in each case to the fullest extent the Officer would have been indemnified as a director or officer of the Bank or the Company, as applicable, and as then permitted under applicable law. (b) The Officer, seeking to claim indemnification under Section 8(a) of this Agreement and upon learning of any such claim, action, suit, proceeding or investigation, shall promptly notify the Bank thereof, but the failure to so notify shall not relieve the Bank or the Company of any liability it may have pursuant to this Agreement to the Officer if such failure does not materially and substantially prejudice the Bank or the Company. In the event of any such claim, action, suit, proceeding or investigation, (i) the Bank and the Company shall have the right to assume the defense thereof with counsel reasonably acceptable to the Officer, and the Bank and the Company shall not be liable to the Officer for any legal expenses of other counsel subsequently incurred by the Officer in connection with the defense thereof, except that if the Bank and the Company do not elect to assume such defense within a reasonable time or counsel for the Officer at any time advises that there are issues which raise conflicts of interest between the Bank or the Company and the Officer (and counsel for the Bank or the Company does not disagree), the Officer may retain counsel satisfactory to the Officer, and the Bank and the Company shall remain responsible for the reasonable fees and expenses of such counsel as set forth above, to be paid promptly as statements therefor are received; provided, however, that the Bank and the Company shall be obligated pursuant to this paragraph (b)(i) to pay for only one firm of counsel for all indemnified parties in any one jurisdiction with respect to any given claim, action, suit, proceeding or Page -13- investigation unless the use of one counsel for such indemnified parties, including the Officer, would present such counsel with a conflict of interest; (ii) the Officer will reasonably cooperate in the defense of any such matter; and (iii) the Bank and the Company shall not be liable for any settlement effected by the Officer without their prior written consent, which shall not be unreasonably withheld. Section 9. Resignation. (a) The Officer may resign from the Officer's employment with the Bank at any time. A resignation under this Section 9 shall be effected by notice of resignation given by the Officer to the Bank and shall take effect on the later of the effective date of termination specified in such notice or the date on which the notice of termination is deemed given by the Officer. For purposes of this Agreement, retirement of the Officer from the employment of the Bank or the Company under circumstances defined as "normal retirement" or "early retirement" pursuant to any qualified defined benefit or qualified defined contribution pension plan maintained by the Bank shall be deemed a resignation by the Officer's of the Officer's employment with the Bank. A resignation by the Officer as described in Section 5(a)(ii) of this Agreement, for purposes of this Agreement shall be deemed to be termination with "Cause". The Officer's resignation of any of the positions within the Bank or the Company to which he has been assigned shall be deemed a resignation from all such positions. (b) The Officer's resignation shall be deemed to be for "Good Reason" if the effective date of resignation occurs during the Term, but on or after the effective date of a Pending Change of Control or Change of Control, and is on account of: (i) the failure of the Bank (whether by act or omission of the Board of Directors, or otherwise) to appoint, re-appoint, elect or re-elect the Officer to the office and position with the Bank that he held immediately prior to the Change of Control or Pending Change of Control (the "Assigned Office") or to a more senior office and position; (ii) if the Officer is or becomes a member of the Board of Directors of the Bank, the failure of the shareholders of the Bank (whether in an election in which the Officer stands as a nominee or in an election where the Officer is not a nominee), to elect or re-elect the Officer to such directorship at the expiration of the Officer's term as a director, unless such failure is a result of the Officer's refusal to stand for election; (iii) a material failure by the Bank, whether by amendment of the charter or organization, by-laws, action of the Board of Directors of the Bank or otherwise, to vest in the Officer the functions, duties, or responsibilities customarily associated with the Assigned Office; provided that the Officer Page -14- shall have given notice of such failure to the Bank, and the Bank has not fully cured such failure within thirty (30) days after such notice is deemed given; (iv) any reduction of the Officer's rate of base salary in effect from time to time, whether or not material, or any failure, other than due to reasonable administrative error that is fully cured within 5 days after notice of such administrative error is deemed given, to pay any portion of the Officer's compensation as and when due; (v) any change in the terms and conditions of any compensation or benefit program in which the Officer participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of the Officer's total compensation package; provided that the Officer shall have given notice of such material adverse effect to the Bank, and the Bank has not fully cured such failure within thirty (30) days after such notice is deemed given; (vi) any material breach by the Company or the Bank of any material term, condition or covenant contained in this Agreement; provided that the Officer shall have given notice to the Company and the Bank of such material adverse effect, and the Company or the Bank have not fully cured such failure within thirty (30) days after such notice is deemed given; or (vii) a change in the Officer's principal place of employment to a location that is outside of Nassau County or Queens County, New York. In all other cases, a resignation by the Officer shall be deemed to be without Good Reason. In the event of resignation, the Officer shall state in the Officer's notice of resignation whether the Officer considers his or her resignation to be a resignation with Good Reason, and if he does, he shall state in such notice the grounds which constitute Good Reason. The Officer's determination of the existence of Good Reason shall be conclusive in the absence of fraud, bad faith or manifest error. (c) In the event of the Officer's resignation for any reason, the Bank shall pay and deliver the Standard Termination Entitlements. In the event of the Officer's resignation with Good Reason and such resignation is effective within six (6) months of the effective date of the Change of Control (the "Resignation Window Period"), the Bank shall also pay and deliver the Additional Termination Entitlements. In the event the Officer's resignation with Good Reason is based upon Section 9(b)(iii),(iv),(v) or (vi) and the notice required by such provision has been given within six months of the effective date of the Change of Control but the applicable cure period will not expire until on or after the date which is six months following the effective date of the Change of Control, the Resignation Window Period shall be extended so as expire 30 days following the expiration of the applicable cure period. Page -15- Section 10. Terms and Conditions of the Additional Termination Entitlements. The Bank and the Officer hereby stipulate that the damages which may be incurred by the Officer following any termination of employment are not capable of accurate measurement as of the date first above written and that the Additional Termination Entitlements constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Officer's efforts, if any, to mitigate damages. The Bank and the Officer further agree that the Bank may condition the payment and delivery of the Additional Termination Entitlements on the receipt of: (a) the Officer's resignation from any and all positions which he holds as an officer, director or committee member with respect to the Bank or any subsidiary or affiliate of the Bank; and (b) a release of the Bank and the Company and their officers, directors, shareholders, subsidiaries and affiliates, in form and substance satisfactory to the Bank, of any liability to the Officer, whether for compensation or damages, in connection with the Officer's employment with the Bank and the termination of such employment, except for the Standard Termination Entitlements, the Additional Termination Entitlements, the Tax Indemnity Payment and indemnification payments due the Officer pursuant to Section 8 or Section 16 of this Agreement. To the extent the Bank conditions the payment and delivery of the Additional Termination Entitlements or any other amount due under this Agreement upon the receipt of the release provided in Section 10(b) of this Agreement and such release by law may not be effective until the expiration of a required prior notice and/or a recission period following its execution by the Officer, then any payment required to be made pursuant to this Agreement may be deferred until the expiration of the period which is the sum of the period within which such payment was required to be made under the terms of this Agreement but for this Section 10 and the period of any required prior notice and recission periods, provided, however, that the Bank shall pay to the Officer for each day of such deferral interest in addition to any other amounts due and owing under this Agreement at the rate of the federal short term rate established under section 1274 of the Code for the month in which the Officer's termination of employment occurs calculated on the basis of a 360 day year for the actual number of days of such deferral on the amount so deferred. Section 11. Confidentiality. Unless the Officer obtains the prior written consent of the Bank or the Company, the Officer shall keep confidential and shall refrain from using for the benefit of himself or herself, or any person or entity other than the Company or any entity which is a subsidiary of the Company or of which the Company is a subsidiary, any material document or information obtained from the Company, or from its parent or subsidiaries, in the course of the Officer's employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of the Officer) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this Section 11 shall Page -16- prevent the Officer, with or without the Company's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. Section 12. No Effect on Employee Benefit Plans or Programs. Except to the extent specifically provided herein, the termination of the Officer's employment during the Assurance Period or thereafter, whether by the Bank or by the Officer, shall have no effect on the rights and obligations of the parties hereto under the Bank's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Bank from time to time; provided, however, that nothing in this Agreement shall be deemed to duplicate any compensation or benefits provided under any severance agreement, plan or program covering the Officer to which the Bank or Company is a party and any duplicative amount payable under any such agreement, plan or program shall be applied as an offset to reduce the amounts otherwise payable hereunder. The Additional Termination Entitlements provided hereunder, when due and payable or provided to the Officer, or in the case of the Officer's death, to his or her estate, surviving dependants or designated beneficiaries, as applicable, are acknowledged to be in lieu of any benefits that would otherwise be provided under such circumstances pursuant to the Bank's Severance Pay Plan, as amended, or Severance Compensation Plan, as amended. Section 13. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Officer, the Officer's legal representatives and testate or intestate distributees, and the Company and the Bank and their respective successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Company or the Bank may be sold or otherwise transferred. Failure of the Company to obtain from any successor its express written assumption of the Company's or Bank's obligations hereunder at least 60 days in advance of the scheduled effective date of any such succession shall, if such succession constitutes a Change of Control, constitute Good Reason for the Officer's resignation on or at any time during the Term following the occurrence of such succession. Section 14. No Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. Section 15. Notices. Any communication required or permitted to be given under this Agreement, including any Page -17- notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Officer: William J. Mannix 3 Sean Michael Court Farmingdale, New York 11735 If to the Company or the Bank: Astoria Financial Corporation One Astoria Federal Plaza Lake Success, New York 11042 Attention: Chairman, President and Chief Executive Officer with a copy to: Thacher Proffitt & Wood Two World Financial Center New York, New York 10281 Attention: W. Edward Bright, Esq. Section 16. Indemnification for Attorneys' Fees. (a) The Bank shall indemnify, hold harmless and defend the Officer against reasonable costs, including legal fees, incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved, as a result of the Officer's efforts, in good faith, to defend or enforce the terms of this Agreement; provided, however, that the Officer shall have substantially prevailed on the merits pursuant to a judgment, decree or order of a court of competent jurisdiction or of an arbitrator in an arbitration proceeding, or in a settlement.. For purposes of this Agreement, any settlement agreement which provides for payment of any amounts in settlement of the Bank's obligations under this Agreement shall be conclusive evidence of the Officer's entitlement to indemnification under this Agreement, and any such indemnification payments shall be in addition to amounts payable pursuant to such settlement agreement, unless such settlement agreement expressly provides otherwise. (b) The Bank's or the Company's obligation to make the payments provided for in this Agreement and otherwise to perform their respective obligations under this Page -18- Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Bank or the Company may have against the Officer or others. In no event shall the Officer be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Officer under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Officer obtains other employment. Unless it is determined that the Officer has acted frivolously or in bad faith, the Bank shall pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Officer may reasonably incur as a result of or in connection with the Officer's consultation with legal counsel or arising out of any action, suit, proceeding, tax controversy, appeal or contest (regardless of the outcome thereof) by the Bank, the Company, the Officer or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Officer about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in section 7872(f)(2)(A) of the Code. Section 17. Employment Rights and Funding Obligations. (a) Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Bank, the Company or the Officer to have the Officer continue as an officer of the Bank or the Company or to remain in the employment of the Bank, the Company. (b) Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Bank, the Company or the Officer to create a trust of any kind to fund any benefits which may be payable pursuant to this Agreement, and to the extent that the Officer acquires a right to receive benefits from the Bank or the Company pursuant to this Agreement, such right shall be no greater than the right of any unsecured general creditor of the Bank or the Company, respectively. Section 18. Withholding. The Bank or the Company, as applicable, shall have the right to deduct and withhold from any amounts paid in cash pursuant to this Agreement by the Bank or the Company, respectively, any taxes or other amounts required by law to be withheld with respect to such payment. Section 19. Compliance with Section 409A of the Code. In the event that this Agreement is construed to be a non-qualified deferred compensation plan described in section 409A of the Code, The Agreement shall be operated, administered and construed so as to conform to the requirements of section 409A. Section 20. Severability. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. Page -19- Section 21. Survival. The rights and obligations of the Bank, the Company and the Officer under this Agreement, unless otherwise expressly provided in this Agreement, shall survive the expiration of the term or other termination of this Agreement. Section 22. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. Section 23. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. Section 24. Governing Law. Except to the extent preempted by federal law, this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to contracts entered into and to be performed entirely within the State of New York. Section 25. Headings and Construction. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. Section 26. Entire Agreement; Modifications. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. Section 27. Required Regulatory Provisions. The following provisions are included for the purposes of complying with various laws, rules and regulations applicable to the Bank: (a) Notwithstanding anything herein contained to the contrary, in no event shall the aggregate amount of compensation payable to the Officer on account of the Officer's termination of employment exceed three times the Officer's average annual total Page -20- compensation for the last five consecutive calendar years to end prior to the Officer's termination of employment with the Bank (or for the Officer's entire period of employment with the Bank if less than five calendar years). (b) Notwithstanding anything herein contained to the contrary, any payments to the Officer by the Bank, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. Section 1828(k), and any regulations promulgated thereunder. (c) Notwithstanding anything herein contained to the contrary, if the Officer is suspended from office and/or temporarily prohibited from participating in the conduct of the affairs of the Bank pursuant to a notice served under section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C. Section 1818(e)(3) or 1818(g)(1), the Bank's obligations under this Agreement shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in such notice are dismissed, the Bank, in its discretion, may (i) pay to the Officer all or part of the compensation withheld while the Bank's obligations hereunder were suspended and (ii) reinstate, in whole or in part, any of the obligations which were suspended. (d) Notwithstanding anything herein contained to the contrary, if the Officer is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under section 8(e)(4) or 8(g)(1) of the FDI Act, 12 U.S.C. Section 1818(e)(4) or (g)(1), all prospective obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights and obligations of the Bank and the Officer shall not be affected. (e) Notwithstanding anything herein contained to the contrary, if the Bank is in default (within the meaning of section 3(x)(1) of the FDI Act, 12 U.S.C. Section 1813(x)(1), all prospective obligations of the Bank under this Agreement shall terminate as of the date of default, but vested rights and obligations of the Bank and the Officer shall not be affected. (f) Notwithstanding anything herein contained to the contrary, all prospective obligations of the Bank hereunder shall be terminated, except to the extent that a continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Director of the Office of Thrift Supervision ("OTS") or his designee or the Federal Deposit Insurance Corporation ("FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in section 13(c) of the FDI Act, 12 U.S.C. Section 1823(c); (ii) by the Director of the OTS or his designee at the time such Director or designee approves a supervisory merger to resolve problems related to the operation of the Bank or when the Bank is determined by such Director to be in an unsafe or unsound condition. The vested rights and obligations of the parties shall not be affected. If and to the extent that any of the foregoing provisions shall cease to be required or by applicable law, rule or regulation, the same shall become inoperative as though eliminated by formal Page -21- amendment of this Agreement. None of the foregoing provisions, other than Section 27(b) shall limit any obligations of the Company under this Agreement. Section 28. Guaranty. The Company hereby irrevocably and unconditionally guarantees to the Officer the payment of all amounts, and the performance of all other obligations, due from the Bank in accordance with the terms of this Agreement as and when due without any requirement of presentment, demand of payment, protest or notice of dishonor or nonpayment. Solely for purposes of determining the extent of the Company's guarantee, the obligations of the Bank under this Agreement shall be determined as though Section 27(a), (c), (d), (e) and (f) did not apply to the Bank. IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to be executed and the Officer has hereunto set the Officer's hand, all as of the day and year first above written. /S/ William J. Mannix ----------------------------------- WILLIAM J. MANNIX Attest: ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION By: /S/ Alan P. Eggleston By: /S/ George L. Engelke, Jr. ----------------------------------- ----------------------------- Name: Alan P. Eggleston Name: George L. Engelke, Jr. Title: Executive Vice President, Secretary Title: Chairman, President and and General Counsel Chief Executive Officer Attest: ASTORIA FINANCIAL CORPORATION By: /S/ Alan P. Eggleston By: /S/ George L. Engelke, Jr. ----------------------------------- ------------------------------- Name: Alan P. Eggleston Name: George L. Engelke, Jr. Title: Executive Vice President, Secretary Title: Chairman, President and and General Counsel Chief Executive Officer Page -22- EX-12 10 ex12-1.txt EXHIBIT 12.1 EXHIBIT 12.1 Statement Regarding Computation of Ratios COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Including Interest on Deposits) Astoria Financial Corporation's ratio of earnings to fixed charges (including interest on deposits) for the year ended December 31, 2005 was as follows: For the Year Ended December 31, 2005 ------------------------------------ (In Thousands) Income before income tax expense ....... $ 352,245 Income tax expense ..................... 118,442 --------------- Net income ............................. $ 233,803 =============== Fixed charges: Interest on borrowings ................. $ 322,808 Interest on deposits ................... 281,399 One-third of rent expense .............. 2,583 --------------- Total fixed charges ...... $ 606,790 =============== Earnings (for ratio calculation) ....... $ 959,035 =============== Ratio of earnings to fixed charges ..... 1.58x COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Excluding Interest on Deposits) Astoria Financial Corporation's ratio of earnings to fixed charges (excluding interest on deposits) for the year ended December 31, 2005 was as follows: For the Year Ended December 31, 2005 ------------------------------------ (In Thousands) Income before income tax expense ....... $ 352,245 Income tax expense ..................... 118,442 --------------- Net income ............................. $ 233,803 =============== Fixed charges: Interest on borrowings ................. $ 322,808 One-third of rent expense .............. 2,583 --------------- Total fixed charges ...... $ 325,391 =============== Earnings (for ratio calculation) ....... $ 677,636 =============== Ratio of earnings to fixed charges ..... 2.08x For purposes of computing the ratios of earnings to fixed charges, earnings consists of income before income taxes plus fixed charges. Fixed charges excluding interest on deposits consist of interest on short-term and long-term debt, interest related to capitalized leases and capitalized interest and one-third of rent expense, which approximates the interest component of that expense. Fixed charges including interest on deposits consist of the foregoing items plus interest on deposits. EX-21 11 ex21-1.txt EXHIBIT 21.1 Exhibit 21.1 Subsidiaries of Astoria Financial Corporation Jurisdiction of Incorporation ----------------------------- Subsidiaries of Astoria Financial Corporation Astoria Federal Savings and Loan Association a/k/a Astoria Federal Savings or Astoria Federal United States Astoria Capital Trust I Delaware AF Insurance Agency, Inc. New York Subsidiaries of Astoria Federal Savings and Loan Association AF Agency, Inc. New York Astoria Federal Mortgage Corp. New York Astoria Federal Savings and Loan Association Revocable Grantor Trust New York Entrust Holding Corp. New York Fidata Service Corp. New York Star Preferred Holding Corporation* New Jersey Suffco Service Corporation New York Astoria Federal has two subsidiaries which may qualify for alternative tax treatment under Article 9A of the New York State Tax Law and therefore, although inactive, are retained by Astoria Federal. Astoria Federal has four additional subsidiaries, two of which are single purpose entities that have interests in real estate investments, which are not material to our financial condition and one of which has no assets or operations but may be used to acquire interests in real estate in the future. The fourth such subsidiary serves as a holding company for one of the other three. Astoria Federal has three additional subsidiaries which are inactive, two of which Astoria Federal intends to dissolve. Subsidiary of Star Preferred Holding Corporation Astoria Preferred Funding Corporation* Delaware *In the process of dissolution. EX-23 12 ex23-1.txt EXHIBIT 23.1 Exhibit 23.1 Consent of Independent Registered Public Accounting Firm The Board of Directors Astoria Financial Corporation: We consent to the incorporation by reference in the Registration Statements (Nos. 33-86248, 33-86250, 33-98500, 333-36807, 333-64895, 333-113745, 333-113785 and 333-130544) on Form S-8, (Nos. 333-101694, 333-29901, 333-58897 and 333-30792) on Form S-4 and (No. 33-98532) on Form S-3 of Astoria Financial Corporation of our reports dated March 8, 2006, with respect to (i) the consolidated statements of financial condition of Astoria Financial Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2005, and (ii) management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 and the effectiveness of internal control over financial reporting as of December 31, 2005, which reports appear in the December 31, 2005 Annual Report on Form 10-K of Astoria Financial Corporation. /s/ KPMG LLP New York, New York March 10, 2006 EX-31 13 ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATIONS I, George L. Engelke, Jr., certify that: 1. I have reviewed this Annual Report on Form 10-K of Astoria Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 10, 2006 /s/ George L. Engelke, Jr. - ------------------------------------------------ George L. Engelke, Jr. Chairman, President and Chief Executive Officer Astoria Financial Corporation EX-31 14 ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATIONS I, Monte N. Redman, certify that: 1. I have reviewed this Annual Report on Form 10-K of Astoria Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 10, 2006 /s/ Monte N. Redman - ---------------------------------------------------- Monte N. Redman Executive Vice President and Chief Financial Officer Astoria Financial Corporation EX-32 15 ex32-1.txt EXHIBIT 32.1 Exhibit 32.1 STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, George L. Engelke, Jr., is the Chairman, President and Chief Executive Officer of Astoria Financial Corporation (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Annual Report on Form 10-K for the year ended December 31, 2005 (the "Report"). By execution of this statement, I certify that: (A) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and (B) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. March 10, 2006 /s/ George L. Engelke, Jr. - -------------- ------------------------------ Dated George L. Engelke, Jr. EX-32 16 ex32-2.txt EXHIBIT 32.2 Exhibit 32.2 STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, Monte N. Redman, is the Executive Vice President and Chief Financial Officer of Astoria Financial Corporation (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Annual Report on Form 10-K for the year ended December 31, 2005 (the "Report"). By execution of this statement, I certify that: (A) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and (B) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. March 10, 2006 /s/ Monte N. Redman - -------------- ------------------------------ Dated Monte N. Redman -----END PRIVACY-ENHANCED MESSAGE-----