10-K405 1 y58674e10-k405.htm ANNUAL REPORT ON FORM 10-K ASTORIA FINANCIAL CORPORATION
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

     
(XBOX)   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

            For the fiscal year ended December 31, 2001

OR

     
(BOX)   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to              

Commission File Number 0-22228

ASTORIA FINANCIAL CORPORATION


(Exact name of registrant as specified in its charter)
     
Delaware   11-3170868

 
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

One Astoria Federal Plaza, Lake Success, New York 11042


(Address of principal executive offices)

(516) 327-3000


(Registrant’s telephone number, including area code)

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

(Securities registered pursuant to Section 12(g) of the Act):
 
Common Stock $.01 par value


(Title of class)
 
Preferred Stock, Purchase Rights


(Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  (XBOX)    NO  (BOX)

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.  (XBOX)

The aggregate market value of voting stock held by non-affiliates of the registrant as of March 15, 2002: Common stock par value $.01 per share, $2,718,930,416. This figure is based on the closing price by the Nasdaq National Market for a share of the registrant’s common stock on March 15, 2002, which was $30.97 as reported in the Wall Street Journal on March 18, 2002. The number of shares of the registrant’s Common Stock outstanding as of March 15, 2002 was 90,632,951 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement dated April 15, 2002 in connection with the Annual Meeting of Stockholders to be held on May 15, 2002 and any adjournment thereof and which is expected to be filed with the Securities and Exchange Commission on or about April 15, 2002, are incorporated by reference into Part III.



 


PART I
Item 1. BUSINESS
Item 2. PROPERTIES
Item 3. LEGAL PROCEEDINGS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
Item 5. MARKET FOR ASTORIA FINANCIAL CORPORATION’S COMMON EQUITY AND RELATED                      STOCKHOLDER MATTERS
Item 6. SELECTED FINANCIAL DATA
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION                      AND RESULTS OF OPERATIONS
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF ASTORIA FINANCIAL CORPORATION
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES
CONSOLIDATED FINANCIAL STATEMENTS OF
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES

INDEX
INDEPENDENT AUDITORS’ REPORT
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXHIBIT 4.5
EXHIBIT 11.1
EXHIBIT 21.1
EXHIBIT 23


Table of Contents

ASTORIA FINANCIAL CORPORATION
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

                 
            Page
Part I
               
 
               
Item 1
  Business     1  
Item 2
  Properties     31  
Item 3
  Legal Proceedings     31  
Item 4
  Submission of Matters to a Vote of Security Holders     34  
 
               
Part II
               
 
               
Item 5
  Market for Astoria Financial Corporation's Common        
 
      Equity and Related Stockholder Matters     35  
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     64  
Item 8
  Financial Statements and Supplementary Data     68  
Item 9
  Changes in and Disagreements with Accountants on        
 
      Accounting and Financial Disclosure     68  
 
               
Part III
               
 
               
Item 10
  Directors and Executive Officers of Astoria Financial Corporation     68  
Item 11
  Executive Compensation     68  
Item 12
  Security Ownership of Certain Beneficial Owners        
 
      and Management     68  
Item 13
  Certain Relationships and Related Transactions     69  
 
               
Part IV
               
 
               
Item 14
  Exhibits, Financial Statement Schedules and Reports on        
 
      Form 8-K     69  
 
               
SIGNATURES
            70  

 


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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions; changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services.

PART I

As used in this Form 10-K, “we,” “us” and “our” refer to Astoria Financial Corporation and its consolidated subsidiaries, including Astoria Federal Savings and Loan Association and its subsidiaries, Astoria Capital Trust I and AF Insurance Agency, Inc.

Item 1.  BUSINESS

General

We are a Delaware corporation organized on June 14, 1993, as the unitary savings and loan association holding company of Astoria Federal Savings and Loan Association, or Astoria Federal. At December 31, 2001, we had assets of $22.67 billion, deposits of $10.90 billion, and stockholders’ equity of $1.54 billion.

Our primary business is the operation of our wholly-owned subsidiary, Astoria Federal. In addition to directing, planning and coordinating the business activities of Astoria Federal, we invest primarily in mortgage-backed securities, U.S. Government and federal agency securities and other securities. We have acquired, and may continue to acquire or organize either directly or indirectly through Astoria Federal, other operating subsidiaries including other financial institutions.

Astoria Federal’s principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowed funds, primarily in one-to-four family mortgage loans and mortgage-backed securities, and, to a lesser extent, multi-family mortgage loans and commercial real estate loans. To a much smaller degree, we also invest in construction loans and consumer and other loans. In addition, Astoria Federal invests in U.S. Government and federal agency securities and other investments permitted by federal laws and regulations. Astoria Federal’s revenues are derived principally from interest on its mortgage loan and mortgage-backed securities portfolios and interest and dividends on its other securities portfolio. Astoria Federal’s cost of funds consists of interest expense on deposits and borrowed funds.

In addition to Astoria Federal, we have two other wholly-owned subsidiaries, AF Insurance Agency, Inc. and Astoria Capital Trust I. AF Insurance Agency, Inc. is a life insurance and variable annuity agent and property and casualty insurance broker. Through a contractual agreement with The Treiber Group LLC and IFS Agencies, Inc., AF Insurance Agency, Inc. provides insurance products to the customers of Astoria Federal. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” or MD&A, for a discussion of Astoria Capital Trust I.

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Lending Activities

General. At December 31, 2001, our net loan portfolio totaled $12.13 billion, or 53.5% of total assets, which includes $43.4 million of loans held-for-sale. 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.

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 (correspondent loan program). The retail loan origination program accounted for approximately $1.30 billion of originations during 2001 and $733.9 million of originations during 2000. We have an extensive broker network in fourteen states: New York, New Jersey, Connecticut, Pennsylvania, Massachusetts, Delaware, Maryland, Ohio, Virginia, North Carolina, South Carolina, Georgia, Illinois and Florida. The broker loan origination program consists of relationships with mortgage brokers and accounted for approximately $1.83 billion of originations during 2001 and $1.16 billion of originations during 2000. Our correspondent loan program, which includes relationships with other financial institutions and mortgage bankers in forty five states, has also contributed to the growth in our loan portfolio and the reduction in our geographical loan concentration in the New York metropolitan area. This program accounted for approximately $1.43 billion of originations during 2001 and $836.8 million of originations during 2000. See the “Loan Portfolio Composition” table on page 26 and the “Loan Maturity, Repricing and Activity” tables on pages 27 and 28.

One-to-Four Family Mortgage Lending. Our primary lending emphasis is on the origination and purchase of first mortgage loans secured by one-to-four family properties that serve as the primary residence of the owner. To a much lesser degree, we make loans secured by non-owner occupied one-to-four family properties acquired as an investment by the borrower. We also offer second mortgage loans which are underwritten according to the same standards as first mortgage loans, although we have originated only a limited number of such loans.

At December 31, 2001, $10.15 billion, or 83.6%, of our total loan portfolio, including loans held-for-sale, consisted of one-to-four family loans, of which $8.0 billion, or 78.8%, were adjustable rate mortgage, or ARM, loans. Our ARM loan portfolio consists primarily of hybrid ARM loans, although we do offer traditional ARM loans as well. We currently offer ARM loans which initially have a fixed rate for one, three, five, seven or ten years and convert into one year ARM loans at the end of the initial fixed rate period. The one, three, five and seven year ARM loans have terms of up to 40 years and the ten year ARM loans have terms of up to 30 years. ARM loans may carry, for a period of time, an initial interest rate which is less than the fully indexed rate for the loan. We determine the initial discounted rate in accordance with market and competitive factors. All ARM loans we offer have annual and lifetime interest rate ceilings and floors. Generally, ARM loans pose credit risks somewhat greater than the risks posed by fixed rate loans primarily because, as interest rates rise, the underlying payments of the borrower rise, increasing the potential for default. 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 (correspondent loan program) 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

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offer a variety of proprietary products which allow the borrower to obtain financing of up to 90% loan-to-value without private mortgage insurance. This type of financing does not comprise a significant portion of our portfolio.

Generally, we originate 15-year and 30-year fixed rate mortgage loans for sale to various governmental agencies or other investors with either servicing retained or released. Generally, the sale of such loans is arranged through a master commitment either on a mandatory delivery or best efforts basis. At December 31, 2001, loans serviced for others totaled $3.32 billion.

One-to-four family loan originations and purchases increased $1.57 billion to $3.94 billion in 2001, from $2.37 billion in 2000. This increase was the result of mortgage interest rates decreasing throughout 2001, significantly increasing the number of mortgage loans refinanced.

Multi-Family, Commercial Real Estate and Construction Mortgage Lending. As of December 31, 2001, our total loan portfolio, including loans held-for-sale, contained $1.09 billion, or 9.0%, of multi-family loans, $598.3 million, or 4.9%, of commercial real estate loans and $50.7 million, or 0.4%, of construction loans. Over the last few years we have increased our emphasis on multi-family and commercial real estate lending. During 2001, we originated $621.0 million of multi-family, commercial, mixed use and construction loans compared to $357.9 million in 2000. Mixed use loans are secured by properties which are intended for both residential and business use and are classified as multi-family or commercial based on the greater number of residential versus commercial units.

The multi-family and commercial real estate loans in our portfolio consist of both fixed rate and adjustable rate loans which were originated at prevailing market rates. Multi-family and commercial real estate loans generally are provided as five to fifteen year term balloon loans amortized over fifteen to thirty years. Our policy generally has been to originate multi-family and commercial real estate loans in the New York metropolitan area. 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 practice is to require a minimum debt service coverage ratio of 1.20 times for multi-family and commercial real estate loans. Additionally, on multi-family and commercial real estate loans, our current practice is to finance up to 75% of the lesser of the purchase price or appraised value of the property securing the loan on purchases and up to 70% of the appraised value on refinances.

The majority of the multi-family loans in our portfolio are secured by six- to forty-unit apartment buildings and mixed use properties (more residential than business units). As of December 31, 2001, our single largest multi-family loan had an outstanding balance of $9.5 million, was current and secured by a 364-unit apartment complex located in Staten Island, New York. At December 31, 2001, the average balance of loans in our multi-family portfolio was approximately $500,000.

Commercial real estate loans typically are secured by retail stores, office buildings and mixed use properties (more business than residential units). As of December 31, 2001, our single largest commercial real estate loan had an outstanding principal balance of $9.0 million, was current and secured by a multi-story office building in Mineola, New York. At December 31, 2001, the average balance of loans in our commercial real estate portfolio was approximately $800,000.

Multi-family and commercial real estate mortgage loans generally involve a greater degree of credit risk than one-to-four family mortgage 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

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borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulation.

We offer construction loans for all types of residential properties and certain commercial real estate properties. Generally, construction loan terms run between one and two years and are interest only, adjustable rate loans indexed to the Prime Rate. Generally, we offer construction loans up to a maximum of $10.0 million. Construction lending generally involves additional credit risks to the lender as compared with other types of mortgage lending. These credit risks are attributable to the fact that loan funds are advanced upon the security of the project under construction, predicated on the present value of the property and the anticipated future value of the property upon completion of construction or development. Construction loans are funded monthly and monitored by a professional construction engineer and our commercial real estate lending department.

Consumer and Other Loans. At December 31, 2001, $242.1 million, or 2.0%, of our total loan portfolio, including loans held-for-sale, consisted of consumer and other loans which were primarily home equity loans. We also offer overdraft protection, lines of credit, commercial loans, passbook loans, student loans and other loans. Consumer and other loans, with the exception of home equity lines of credit, are offered primarily on a fixed rate, short-term basis. The underwriting standards we employ for consumer loans include a determination of the borrower’s payment history on other debts and an assessment of the borrower’s ability to make payments on the proposed loan and other indebtedness. In addition to the credit worthiness of the borrower, the underwriting process also includes a review of the value of the collateral, if any, in relation to the proposed loan amount. Our consumer 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 loans are generally limited to aggregate outstanding indebtedness secured by up to 80% of the appraised value of the property. Such lines of credit are underwritten based upon our internal guidelines in order to evaluate the borrower’s ability and willingness to repay the debt.

Included in consumer and other loans were $18.1 million of commercial loans at December 31, 2001. These loans are underwritten based upon the earnings of the borrower and the value of the collateral securing such loans, if any.

Loan Approval Procedures and Authority. Except for loans in excess of $7.5 million, mortgage loan approval authority has been delegated by the Board of Directors to our underwriters and Loan Committee, which consists of certain members of executive management and other Astoria Federal officers.

Upon receipt of a completed application from a prospective borrower, for mortgage loans secured by one-to-four family properties, we generally order a credit report, verify income and other information and, if necessary, obtain additional financial or credit related information. An appraisal of the real estate used for collateral is also obtained. For mortgage loans secured by multi-family properties and commercial real estate, appraisals are obtained as part of the final underwriting process. All appraisals are performed by licensed or certified appraisers. Most appraisals are performed by licensed independent third party appraisers. The Board of Directors annually reviews and approves our appraisal policy.

Asset Quality

General. One of our key operating objectives has been and continues to be to maintain a high level of asset quality. Through a variety of strategies, including, but not limited to, borrower workout

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arrangements and aggressive marketing of foreclosed properties, we have been proactive in addressing problem and non-performing assets which, in turn, has helped to build the strength of our financial condition. Such strategies, as well as our concentration on one-to-four family mortgage lending, the maintenance of sound credit standards for new loan originations, and a strong real estate market, have resulted in our maintaining a very low level of non-performing assets.

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 primarily on employment and other sources of income, which in turn is impacted by general economic conditions, although other factors, such as unanticipated expenditures or changes in the financial markets may also impact a borrower’s ability to pay. Collateral values, particularly real estate values, are also impacted by a variety of factors including general economic conditions, demographics, maintenance and collection or foreclosure delays.

Non-performing Assets. Non-performing assets totaled $40.1 million at December 31, 2001. Non-performing assets include non-accrual loans, loans delinquent 90 days or more and still accruing interest, real estate owned, or REO, and non-performing investments in real estate.

We discontinue accruing interest when loans become 90 days delinquent as to their interest due, even though in most instances the borrower has only missed two payments. In addition, we reverse all previously accrued and uncollected interest through a charge to interest income. While loans are in non-accrual status, interest due is monitored and income is recognized only to the extent cash is received until a return to accrual status is warranted. In some circumstances we continue to accrue interest on loans delinquent 90 days or more as to their maturity date but not their interest due. In general, 90 days prior to a loan’s maturity, the borrower is reminded of the maturity date. Where the borrower has continued to make monthly payments to us and where we do not have a reason to believe that any loss will be incurred on the loan, we have treated these loans as current and have continued to accrue interest. Such loans consist primarily of one-to-four family mortgage loans and totaled $1.3 million at December 31, 2001.

Total non-performing assets increased slightly to $40.1 million at December 31, 2001, from $40.0 million at December 31, 2000. Non-performing loans, a component of non-performing assets, increased by $929,000 to $37.1 million at December 31, 2001, from $36.2 million at December 31, 2000. The ratio of non-performing loans to total loans decreased to 0.31% at December 31, 2001, from 0.32% at December 31, 2000. Our ratio of non-performing assets to total assets was 0.18% at December 31, 2001 and 2000. The allowance for loan losses as a percentage of total non-performing loans was 221.70% at December 31, 2001, compared to 220.88% at December 31, 2000. The allowance for loan losses as a percentage of total non-accrual loans was 229.60% at December 31, 2001, compared to 226.85% at December 31, 2000. For a further discussion of the allowance for loan losses and non-performing assets and loans, see Item 7, “MD&A.”

Real Estate Owned. The net carrying value of our REO totaled $3.0 million at December 31, 2001 and consisted primarily of one-to-four family properties. The REO balance decreased $814,000, from $3.8 million at December 31, 2000. REO is carried net of all allowances for losses at the lower of cost or fair value less estimated selling costs. See the table on page 29 for further detail on our REO.

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

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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” assets. An asset classified as special mention has potential weaknesses, which, if uncorrected, may result in the deterioration of the repayment prospects or in the institution’s credit position at some future date. An asset is considered substandard if it 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 the institution 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 29 for additional information on our classified assets.

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 (with a corresponding charge to the provision for loan losses) 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, 2001, net of their related allowance for loan losses of $2.5 million, totaled $13.0 million. Interest income recognized on impaired loans amounted to $1.1 million for the year ended December 31, 2001. 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. 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. The allowance is comprised of both specific valuation allowances, which are allowances allocated to specific properties, and general valuation allowances which have been established to recognize the inherent risks in our portfolio associated with lending activities.

Specific reserves are established in connection with individual loan review and the asset classification process. Such evaluation, which includes, but is not limited to, a review of loans on which full collectibility is not reasonably assured, considers among other matters the estimated fair value of the underlying collateral, if any, economic and regulatory conditions, current and historical loss experience and other factors to arrive at an adequate loan loss allowance. Pursuant to our policy, loan losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectible.

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 an appraisal, a real estate broker’s opinion as to the value of the property is obtained based primarily on a drive-by inspection and a comparison of the property securing the loan with similar properties in the area. In circumstances for which we have determined that repayment of the loan will be based solely on the collateral and the unpaid balance of the loan is greater than the estimated fair value of such collateral, a specific valuation allowance is established for the difference between the carrying value and the estimated fair value.

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 assets. The determination of the adequacy of the valuation allowance is a multidimensional process which takes into consideration a variety of factors. We segment our portfolio into like categories by composition (e.g., one-to-four family, multi-family,

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commercial real estate, etc.) and size (e.g., less than $500,000, greater than $1.0 million, etc.) and perform a variety of analyses against each category. These include, but are not limited to, migration analysis, delinquency levels and trends and historical loss experience. We also consider the growth in the portfolio as well as our credit administration and asset management philosophies and procedures. In conjunction with the characteristics of the portfolio, we evaluate and consider the impact that existing and projected economic conditions may have on the portfolios. Finally, we evaluate and consider the allowance ratios and coverage percentages of peer groups and regulatory groups.

In addition to the requirements of accounting principles generally accepted in the United States of America, or GAAP, related to loss contingencies, a federally chartered savings association’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Office of Thrift Supervision, or OTS. The OTS, in conjunction with the other federal banking agencies, provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of valuation allowances. It is required that all institutions have effective systems and controls to identify, monitor and address asset quality problems, analyze all significant factors that affect the collectibility of the portfolio in a reasonable manner and establish acceptable allowance evaluation processes that meet the objectives of the federal regulatory agencies.

While we believe that the allowance for loan losses has been established and maintained at adequate levels, future adjustments may be necessary if economic or other conditions differ substantially from the conditions used in making the initial determinations. In addition, there can be no assurance that the OTS or other regulators, as a result of reviewing our loan portfolio and/or allowance, will not request us to alter our allowance for loan losses, thereby affecting our financial condition and earnings.

Investment Activities

General. Our investment policy is designed primarily to complement our lending activities, to generate a favorable return without incurring undue interest rate and credit risk, to enable us to manage the interest rate sensitivity of our overall assets and liabilities and to 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. Our investment policy also permits us to invest in certain derivative financial instruments. At December 31, 2001, we had interest rate caps with an aggregate notional amount of $250.0 million. These interest rate caps provide a global hedge against rising interest rates and subsequent increases in our cost of funds. We do not use derivatives for trading purposes. See Note 1 and Note 11 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data,” for further discussion of such derivative financial instruments.

Securities. Federally chartered savings associations have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, mortgage-backed securities, including collateralized mortgage obligations, or CMOs, and real estate mortgage investment conduits, or REMICs, certain certificates of deposit of insured banks and federally chartered savings associations, certain bankers acceptances and, subject to certain limits, corporate securities, commercial paper and mutual funds.

Our focus over the last two years has been to reposition our balance sheet emphasizing the origination of mortgage loans, primarily one-to-four family. As a result of this strategy, our portfolio of mortgage-backed securities and other securities decreased $1.41 billion, or 14.9%, to $8.01 billion at December 31, 2001, from $9.42 billion at December 31, 2000.

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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, mortgage-backed securities issued or guaranteed by Fannie Mae, or FNMA, the Federal Home Loan Mortgage Corporation, or FHLMC, and the Government National Mortgage Association, or GNMA, are weighted at no more than 20% for 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 remain subject to the risk of a fluctuating interest rate environment. Along with other factors, such as the geographic distribution of the underlying mortgage loans, changes in interest rates typically alter the prepayment rate of those underlying mortgage loans and affect both the prepayment rate and estimated market value of mortgage-backed securities.

As a member of the Federal Home Loan Bank of New York, or FHLB-NY, Astoria Federal is required to maintain a specified investment in the capital stock of the FHLB-NY. See “Regulation and Supervision — Federal Home Loan Bank System.”

Federal Funds Sold and Repurchase Agreements. We invest in a wide range of money market instruments, including overnight and term federal funds and repurchase agreements (securities purchased under agreements to resell). Money market instruments are used to invest our available funds resulting from cash flow and to help satisfy liquidity needs. For a further discussion of our federal funds sold and repurchase agreements, see Item 7, “MD&A” and Note 1 and Note 2 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

Securities Portfolio Composition. At December 31, 2001, we had $6.57 billion in REMIC and CMO mortgage-backed securities, or 29.0% of total assets, of which 91.3% had fixed rates. Of the REMIC and CMO securities portfolio, $4.38 billion, or 66.6%, are insured or guaranteed, either directly or indirectly, by FNMA, FHLMC 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. Our fixed rate REMIC and CMO securities had coupon rates ranging from 5.00% to 7.50% and a weighted average yield of 6.30% at December 31, 2001. Our adjustable rate REMIC and CMO securities, a majority of which are indexed to the one-month LIBOR, had coupon rates ranging from 2.79% to 8.19% and a weighted average yield of 3.44% at December 31, 2001. We believe these securities represent attractive and limited risk alternatives to other investments due to the wide variety of maturity and repayment options available. In addition, we had $499.4 million, or 2.2% of total assets, in mortgage-backed pass-through certificates insured or guaranteed by either FNMA, FHLMC or GNMA. The remaining securities portfolio of $939.1 million, or 4.1% of total assets, consists of obligations of the U.S. Government and agencies, obligations of state and political subdivisions and equity and corporate debt securities. At December 31, 2001, our securities available-for-sale totaled $3.55 billion and our securities held-to-maturity totaled $4.46 billion. Included in the total securities portfolio are various callable securities, which generally possess higher yields than those securities of similar contractual terms to maturity without call features. As of December 31, 2001, the amortized cost of such callable securities totaled $905.4 million. Securities called during the year ended December 31, 2001 totaled $677.9 million.

During the quarter ended June 30, 2001, we transferred agency REMIC and CMO securities with an amortized cost of $2.90 billion and a market value of $2.88 billion from available-for-sale to held-to-maturity.

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For a further discussion of our securities portfolio, see the tables on pages 24 and 25, Item 7, “MD&A” and Note 3 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

Sources of Funds

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

Deposits. We offer a variety of deposit accounts with a range of interest rates and terms. We presently offer passbook and statement savings accounts, NOW accounts, money market accounts, demand deposit accounts and certificates of deposit. The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates, pricing of deposits and competition. Our deposits are primarily obtained from areas surrounding our banking offices. We rely primarily on marketing, new products, service and long-standing relationships with customers to attract and retain these deposits. Brokered deposits are used occasionally to supplement retail customer deposits in raising funds for financing and liquidity purposes, however, at December 31, 2001 we had no brokered deposits. At December 31, 2001, our deposits totaled $10.90 billion. Of the total deposit balance, $1.40 billion, or 12.8%, represent Individual Retirement Accounts.

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 have maintained a high level of core deposits, which has contributed to our low cost of funds. Core deposits include savings, money market, NOW and demand deposit accounts, which, in the aggregate, represented 52.7% of total deposits at December 31, 2001 and 48.9% of total deposits at December 31, 2000.

For a further discussion of our deposits, see the tables on pages 29 and 30, Item 7, “MD&A” and Note 7 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

Borrowings. We enter into reverse repurchase agreements 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 agreements to repurchase. We also obtain advances from the FHLB-NY which are generally secured by a blanket lien against, among other things, Astoria Federal’s mortgage portfolio and Astoria Federal’s investment in the stock of the FHLB-NY. See “Regulation and Supervision — Federal Home Loan Bank System.” 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. In addition, at December 31, 2001, we had available a 12-month commitment for overnight and one month lines of credit with the FHLB-NY totaling $100.0 million. Both lines of credit are priced at the federal funds rate plus 10.0 basis points and reprice daily. Other borrowings consist of a medium term note and senior unsecured notes at December 31, 2001.

During the year ended December 31, 2001, as part of our strategy to reposition the balance sheet while emphasizing deposit generation, as well as part of our interest rate risk management strategy, we decreased our borrowings by $498.8 million, or 4.9%, to $9.70 billion at December 31, 2001, from $10.20 billion at December 31, 2000. At December 31, 2001, we had $5.94 billion of borrowings which are callable within one year and at various times thereafter and have contractual maturities of up to seven years.

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For a further discussion of our borrowings, see Item 7, “MD&A” and Note 8 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

Capital Trust Securities. At December 31, 2001, we had $125.0 million of 9.75% Series A Capital Securities, due November 1, 2029, which were issued in October 1999. For further information on our Capital Trust Securities see “Subsidiary Activities,” Item 7, “MD&A” and Note 9 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 and growing our mutual fund, deferred annuities and insurance sales. Our mutual fund, deferred annuities and insurance sales are operated out of our wholly-owned subsidiaries. See “Subsidiary Activities.”

Subsidiary Activities

We have three wholly-owned subsidiaries, Astoria Federal, Astoria Capital Trust I and AF Insurance Agency, Inc.

Astoria Capital Trust I was formed in October 1999 in connection with the issuance of $125.0 million of Series A Capital Securities. See Item 7, “MD&A” and Note 9 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data” for further discussion of the Series A Capital Securities.

AF Insurance Agency, Inc. is a life insurance and variable annuity agent and property and casualty insurance broker. Through contractual arrangements with The Treiber Group LLC and IFS Agencies, Inc., AF Insurance Agency, Inc. provides insurance products to the customers of Astoria Federal.

At December 31, 2001, the following were wholly-owned subsidiaries of Astoria Federal:

AF Agency, Inc. was formed in 1990 to offer tax-deferred annuities and a variety of mutual funds through its licensed agents and stock brokerage services through an unaffiliated third party vendor. Astoria Federal is reimbursed for expenses and administrative services it provides to AF Agency, Inc. Fees generated by AF Agency, Inc. totaled $6.7 million for the year ended December 31, 2001, which represented 6.6% of non-interest income.

Astoria Federal Savings and Loan Association Revocable Grantor Trust, or AFS Grantor Trust, was formed in November 2000 in connection with the establishment of a bank owned life insurance, or BOLI, program by Astoria Federal. The initial premium paid was $250.0 million.

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, and Starline Development Corp., or Starline. APFC and Starline, which hold $4.24 billion of mortgage loans as of December 31, 2001, qualify as real estate investment trusts created pursuant to the Internal Revenue Code of 1986, as amended.

Suffco Service Corporation serves as document custodian in connection with mortgage loans being serviced for FNMA and certain other investors.

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201 Old Country Road Inc. was formed as a special purpose subsidiary which holds $65.6 million of mortgage loans at December 31, 2001 that served as collateral for a funding note which was repaid in June 2001.

Infoserve Corporation provides research information services for Astoria Federal and other financial institutions. The research provided stems from services Infoserve Corporation offered in the past as a subsidiary of The Greater New York Savings Bank, or The Greater, for check clearing and processing as well as check and money order issuances.

Entrust Holding Corp. is the owner of a fifty percent (50%) interest in Entrust Title Agency, LLC, which sells title insurance.

AF Roosevelt Avenue Corp. is inactive but has been retained by Astoria Federal due to its involvement in a litigation matter. Once the litigation is resolved, Astoria Federal intends to dissolve this subsidiary.

Astoria Federal has four subsidiaries which may qualify for alternative tax treatment under Article 9A of the New York State Tax Law and therefore, although inactive, are retained by Astoria Federal.

Astoria Federal has seven subsidiaries, four of which are single purpose entities that have interests in individual real estate investments, which individually and in the aggregate are not material to our financial condition, and two of which have no assets or operations but may be used to acquire interests in real estate in the future. The seventh such subsidiary serves as a holding company for one of the other six.

Astoria Federal has one additional subsidiary which is inactive and which Astoria Federal intends to dissolve.

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 competitive advantage 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, 2001, Astoria Federal ranked third in deposit market share with an 8.9% market share in the Long Island market which includes the combined counties of Nassau, Suffolk, Queens and Brooklyn, based on the “FDIC Deposit Market Share Report” dated June 30, 2001, including any pending acquisitions. Astoria Federal originates mortgage loans through its banking and loan production offices in the New York metropolitan area, through an extensive broker network in fourteen states and through a third party loan origination program in forty five states.

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. 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. 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

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mutual funds and other corporate and government securities funds as well as from other financial intermediaries such as brokerage firms and insurance companies.

During 2001, the nation experienced an economic slowdown, creating the country’s first recession in more than a decade. The equity markets continued to retract, contributing to a reduction in consumers’ wealth. Corporate failures, restructurings and layoffs led to an increase in the nation’s unemployment rate. The New York metropolitan area has also experienced this slowdown, albeit to a lesser degree. The Federal Open Market Committee, or FOMC, has challenged this economic slowing by lowering the federal funds rate on eleven occasions, for a total of 475 basis points, during 2001. Despite the economic slowdown, we have not experienced any deterioration in our credit quality and related measures. The national and local real estate markets have remained strong and continue to support new and existing home sales. While the strength of the real estate markets has helped us maintain our strong credit quality and purchase mortgage activity, the decline in interest rates has resulted in an extraordinary increase in refinance and prepayment activity. As a result, we, along with other mortgage originators and investors, have been faced with the increased challenge of redeployment of funds in a lower interest rate environment. Our broker and third party loan origination programs provide efficient and diverse delivery channels for excessive cash flow. Additionally, they provide geographic diversification reducing exposure to concentrations of credit risk. At December 31, 2001, $6.05 billion, or 50.8%, of our total mortgage loan portfolio was secured by properties located in 46 states other than New York. Excluding New York, we have a concentration of mortgage lending of greater than 5.0% in three states: Connecticut, which comprises 11.5% of our total mortgage loan portfolio; New Jersey, which comprises 8.7% of our total mortgage loan portfolio; and Maryland, which comprises 5.3% of our total mortgage loan portfolio.

The terrorist attacks on September 11, 2001 destroyed several buildings in the New York City financial district, forced the closure of the nation’s key financial markets for several days and significantly disrupted many local businesses. While these events have intensified the challenges we have encountered during the past year, they have not, to date, had a significant impact on our financial condition or results of operations. Our banking and lending operations were not disrupted by these events and we do not have significant real estate lending or other operations in the immediate area of the attack. We expect that any possible future impact caused by this event will result from its impact on overall economic conditions, nationally and locally, and its effects on the actions of our customers.

Mergers and Acquisitions

We continue to evaluate merger and acquisition activity as part of our strategic objective for long-term growth. Between 1995 and 1998, we completed the acquisitions of Fidelity New York, FSB, or Fidelity, and The Greater, which were accounted for as purchases, and Long Island Bancorp, Inc., or LIB, which was accounted for as a pooling-of-interests. These acquisitions have enabled us to expand our operations through an increased customer base, thereby increasing deposits and loan originations and providing customers with a broader array of financial products and services. Acquisition candidates have been selected based on, among other factors, the extent to which the candidates could enhance our retail presence in new or existing markets. The combined effect of these business combinations resulted in an increase in assets of $10.79 billion, an increase in deposits of $6.24 billion and an increase in stockholders’ equity of $857.7 million. Goodwill created in the two purchase accounting transactions totaled $281.5 million. The balance of goodwill related to these transactions was $185.2 million at December 31, 2001. As a result of the implementation of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” or SFAS No. 142, effective January 1, 2002, we will cease recording amortization of goodwill of approximately $19.1 million annually. See Item 7, “MD&A,” and Note 1 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data” for further discussion of SFAS No. 142.

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Personnel

As of December 31, 2001, we had 1,719 full-time employees and 332 part-time employees, or 1,885 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 Federal Deposit Insurance Corporation, or 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 Federal Home Loan Bank, or FHLB, System 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, 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 and the FDIC periodically perform safety and soundness examinations of Astoria Federal and us and test our compliance with various regulatory requirements. 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 establish a comprehensive framework to regulate and control the activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the OTS, FDIC or Congress, could have a material adverse impact on Astoria Federal and us and our respective operations.

The description of statutory provisions and regulations applicable to federally chartered savings associations and their holding companies and of tax matters set forth in this document does not purport to be a complete description of such statutes and regulations and their effects on Astoria Federal and us.

Federally Chartered Savings Association Regulation

Business Activities. Astoria Federal derives its lending and investment powers from the Home Owners’ Loan Act, as amended, or HOLA, and the regulations of the OTS thereunder. Under these laws and regulations, Astoria Federal may invest in mortgage loans secured by residential and non-residential real estate, commercial and consumer loans, certain types of debt securities and certain other assets. Astoria Federal may also establish service corporations that may engage in activities not otherwise permissible for Astoria Federal, including certain real estate equity investments and securities and insurance brokerage activities. These investment powers are subject to various limitations, including (1) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories, (2) a limit of 400% of an association’s capital on the aggregate amount of loans secured by non-residential real estate property, (3) a limit of 20% of an association’s assets on commercial loans, with the amount of commercial loans in excess of 10% of assets being limited to small business loans, (4) a limit of 35% of an association’s assets on the aggregate amount of consumer loans and acquisitions of certain debt securities, (5) a limit of 5% of assets on

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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 capital ratios: a 1.5% tangible capital ratio, a 4% leverage (core capital) ratio and an 8% 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, 2001, Astoria Federal exceeded each of its capital requirements with a tangible capital ratio of 5.88%, leverage capital ratio of 5.88% and risk-based capital ratio of 13.75%.

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 adopted regulations, effective January 1, 1994, that set forth the methodology for calculating an IRR component to be incorporated into the OTS risk-based capital regulations. The OTS had indefinitely deferred the implementation of the IRR component in the computation of an institution’s risk-based capital, and, on March 15, 2001, the OTS proposed regulations which would eliminate the IRR component of risk-based capital. Under the proposed regulations, however, the OTS would continue to monitor the IRR of individual institutions through the OTS requirements for IRR management, the ability of the OTS to impose an individual minimum capital requirement on institutions that exhibit a high degree of IRR, and the requirements of Thrift Bulletin 13a, which provides guidance on the management of IRR and the responsibility of boards of directors in that area.

The OTS continues to monitor the IRR of individual institutions through analysis of the change in net portfolio value, or NPV. The OTS has also used this NPV analysis as part of its evaluation of certain applications or notices submitted by thrift institutions. For a more complete discussion of NPV analysis, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.” 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 supervisory actions against undercapitalized institutions, based upon five categories of capitalization which FDICIA created: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized,” the severity of which depends upon the institution’s degree of capitalization. Generally, a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” In addition, various mandatory supervisory actions become immediately applicable to the institution, including restrictions on growth of assets and other forms of expansion. Under the OTS regulations, generally, a federally chartered savings association is treated as well capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, and its leverage ratio is 5% or greater, and it is not subject to any order or directive by the OTS to meet a specific capital level. As of December 31, 2001, Astoria Federal was considered “well capitalized” by the OTS.

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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 the reporting period ending seven months before 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 category 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. The FDIC has recently alerted insured institutions to the possibility of higher deposit insurance premiums in the second half of 2002. The FDIC stated that the higher premiums, if necessary, would likely affect only institutions with BIF insured deposits and that the amount of any increase would not exceed 5 basis points. While increases in deposit insurance premiums could have an adverse effect on our earnings, the recent advisory statement from the FDIC, if acted upon, is not expected to have a material adverse effect on our earnings. In addition, 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 2001 for the assessment for the FICO payments was $2.0 million.

Loans to One Borrower. Under the HOLA, savings associations are generally subject to the national bank limits on loans to one borrower. Generally, savings associations may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the institution’s unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral. Astoria Federal is in compliance with applicable loans to one borrower limitations. At December 31, 2001, Astoria Federal’s largest aggregate amount of loans to one borrower totaled $34.8 million. All of the loans for the largest borrower were performing in accordance with their terms and the borrower had no affiliation with Astoria Federal.

Qualified Thrift Lender, or QTL, Test. The HOLA requires savings associations to meet a QTL test. Under the QTL test, a savings association is required to maintain at least 65% of its “portfolio assets” (total assets less (1) specified liquid assets up to 20% of total assets, (2) intangibles, including goodwill, and (3) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities, credit card loans, student loans, and small business loans) on a monthly basis in 9 out of every 12 months. As of December 31, 2001, Astoria Federal maintained in excess of 90% 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 ending December 31, 2001. 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, (3) obtaining advances from any FHLB, and (4) establishing any new branch office in a location not permissible for a national bank in the association’s home state. In addition, beginning three years after the association failed the QTL test,

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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 the proposed capital distribution.

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.

In addition, Astoria Federal may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause stockholders’ equity to be reduced below the amounts required for the liquidation accounts which were established as a result of Astoria Federal’s conversion from mutual to stock form of ownership and the acquisitions of Fidelity, The Greater and LIB. For further discussion on the liquidation accounts, see Item 7, “MD&A” and Note 10 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

Liquidity. Congress eliminated the statutory liquidity requirement which required Astoria Federal to maintain a minimum amount of liquid assets of between 4% and 10%, as determined by the Director of the OTS, Astoria Federal’s primary federal regulator. Effective March 15, 2001, the OTS adopted an interim rule conforming its regulations to reflect this statutory change. Under the revised regulations, which became finalized and effective July 18, 2001, Astoria Federal is required to maintain sufficient liquidity to ensure its safe and sound operation. Astoria Federal’s liquidity ratio at December 31, 2001 was 8.14%.

Assessments. The OTS charges assessments to recover the costs of examining savings associations and their affiliates. These assessments are based on three components: the size of the association, on which the basic assessment is based; the association’s supervisory condition, which results in an additional assessment based on a percentage of the basic assessment for any savings institution with a composite rating of 3, 4 or 5 in its most recent safety and soundness examination; and the complexity of the association’s operations, which results in an additional assessment based on a percentage of the basic assessment for any savings association that managed over $1.00 billion in trust assets, serviced for others loans aggregating more than $1.00 billion, or had certain off-balance sheet assets aggregating more than $1.00 billion. In order to avoid a disproportionate impact on the smaller savings institutions, which are those whose total assets never exceeded $100.0 million, the OTS regulations provide that the portion of the assessment based on asset size be the lesser of the assessment under the amended

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regulations or the regulations before the amendment. For the year ended December 31, 2001, we paid $2.7 million in assessments.

Branching. The OTS regulations authorize federally chartered savings associations to branch nationwide to the extent allowed by federal statute. This permits federal savings and loan associations with interstate networks to more easily diversify their loan portfolios and lines of business geographically. OTS authority preempts any state law purporting to regulate branching by federal savings associations.

Community Reinvestment. Under the Community Reinvestment Act, or CRA, as implemented by the OTS regulations, a federally chartered savings association has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the OTS, in connection with its examination of a federally chartered savings association, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The assessment focuses on three tests: (1) a lending test, to evaluate the institution’s record of making loans in its service areas; (2) an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (3) a service test, to evaluate the institution’s delivery of services through its branches, ATMs, and other offices. The CRA also requires all institutions to make public disclosure of their CRA ratings. Astoria Federal has been rated as “outstanding” as of its most recent CRA examination and has been rated as “outstanding” over its last four examinations. Regulations implementing the requirements under the Gramm-Leach-Bliley Act, or Gramm-Leach, that insured depository institutions publicly disclose certain agreements that are in fulfillment of CRA became effective on April 1, 2001. 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, as well as additional limitations as may be adopted by the OTS Director. 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.

Standards for Safety and Soundness. Pursuant to the requirements of FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, or Community Development Act, the OTS, together with the other federal bank regulatory agencies, adopted guidelines establishing general standards, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, and 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, regulations were adopted 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 may issue an order directing corrective and 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

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comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties.

Insurance Activities. Astoria Federal is generally permitted to engage in certain insurance activities through its subsidiaries. In October 2001, the OTS and the other federal banking agencies adopted 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. The implementation of these regulations did not have a material impact on our operations.

Privacy Protection

Effective July 1, 2001, financial institutions, including Astoria Federal, became subject to OTS regulations implementing the privacy protection provisions of 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. The implementation of these regulations did not have a material adverse effect on our operations.

Gramm-Leach also provides for the ability of each state to enact legislation that is more protective of consumers’ personal information. Currently there are a number of privacy bills pending in the New York legislature. No action has been taken on any of these bills, and we cannot predict whether any of them will become law or what impact, if any, these bills will have if enacted into law.

On February 1, 2001, the OTS and other federal banking agencies adopted guidelines establishing standards for safeguarding customer information to implement certain provisions of Gramm-Leach. The guidelines describe the agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to insure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. We implemented the guidelines prior to their effective date of July 1, 2001 and such implementation did not have a material adverse effect on our operations.

Federal Home Loan Bank System

Astoria Federal is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. Astoria Federal, as a member of the FHLB-NY, is 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, 0.3% of total assets, or 5% of its borrowings from the FHLB-NY, whichever is greater. Astoria Federal was in compliance with this requirement with an investment in FHLB-NY stock at December 31, 2001, of $250.5 million. Dividends from the FHLB-NY to Astoria Federal amounted to $17.5 million for the year ended December 31, 2001, $19.2 million for the year ended December 31, 2000 and $17.4 million for the year ended December 31,

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1999. Pursuant to Gramm-Leach, the foregoing minimum share ownership requirements will be replaced by regulations to be promulgated by the Federal Housing Finance Board. Gramm-Leach specifically provides that the minimum requirements in existence immediately prior to adoption of Gramm-Leach shall remain in effect until such regulations are adopted. Formerly, federal savings associations were required to be members of the FHLB System. The new law removed the mandatory membership requirement and authorized voluntary membership for federal savings associations, as is the case for all other eligible institutions.

Federal Reserve System

Federal Reserve Board regulations require federally chartered savings associations to maintain non-interest-earning cash reserves against their transaction accounts (primarily NOW and regular checking accounts). A reserve of 3% is to be maintained against aggregate transaction accounts between $5.7 million and $41.3 million (subject to adjustment by the Federal Reserve Board) and a reserve of 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $41.3 million. The first $5.7 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) is exempt from the reserve requirements. Astoria Federal is in compliance with the foregoing requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, 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 Federal Reserve Board regulations require institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank.

The USA PATRIOT Act

In response to the events of September 11, 2001, President George W. Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new 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 imposes the following requirements with respect to financial institutions:

    Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that include, at minimum: (1) internal policies, procedures, and controls, (2) specific designation of an anti-money laundering compliance officer, (3) ongoing employee training programs, and (4) an independent audit function to test the anti-money laundering program. Rules promulgated under Section 352 are due by April 24, 2002.
 
    Section 326 authorizes the Secretary of the Department of Treasury, in conjunction with other bank regulators, to issue regulations by October 26, 2002 that provide for minimum standards with respect to customer identification at the time new accounts are opened.
 
    Section 312 requires financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) to establish appropriate, specific, and, where necessary, enhanced due diligence policies,

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      procedures, and controls designed to detect and report money laundering. Rules promulgated under Section 312 are due by April 24, 2002, to be effective by July 23, 2002.
 
    Effective December 25, 2001, financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks.
 
    Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.

Holding Company Regulation

We are a unitary savings and loan 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 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 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 an 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 Securities Exchange Act of 1934, as amended, or the Exchange Act.

Delaware Corporation Law

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

Federal Taxation

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

Corporate Alternative Minimum Tax. In addition to the regular income tax, corporations (including savings and loan associations) generally are subject to an alternative minimum tax, or AMT, in an

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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 are subject to recapture 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” and Note 13 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

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 8.5%, (8% effective for taxable years beginning after July 1, 2001 and 7.5% effective for taxable years beginning after July 1, 2002). If, however, the application of an alternative minimum tax (based on taxable assets allocated to New York, “alternative” net income, or a flat minimum fee) results in a greater tax, an alternative minimum tax will be imposed. In addition, New York State imposes a tax surcharge of 17% of the New York State franchise tax, calculated using an annual franchise tax rate of 9.0% (which represents the 2000 annual franchise tax rate), allocable to business activities carried on in the Metropolitan Commuter Transportation District. These taxes apply to us, Astoria Federal and certain of Astoria Federal’s subsidiaries. Certain subsidiaries of a banking corporation may be subject to a general business corporation tax in lieu of the tax on banking corporations. The rules regarding the determination of income allocated to New York and alternative minimum taxes differ for these subsidiaries.

Bad Debt Deduction. New York State passed legislation that incorporated the former provisions of Internal Revenue Code, or IRC, Section 593 into New York State tax law. The impact of this

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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 their assets and the nature of their 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 their 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.

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.

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Statistical Data

The detailed statistical data which follows is presented in accordance with Guide 3, prescribed by the Securities and Exchange Commission, or SEC. This data should be read in conjunction with Item 7, “MD&A” and Item 8, “Financial Statements and Supplementary Data.”

Information regarding distribution of assets, liabilities and stockholders’ equity; interest rates and interest differential appears under Item 7, “MD&A.” Pages 44 through 46 present the distribution of assets, liabilities and stockholders’ equity under the caption “Analysis of Net Interest Income,” and the interest differential under the caption “Rate/Volume Analysis.”

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Securities Portfolio

The following table sets forth the composition of our available-for-sale (at fair value) and held-to-maturity securities portfolios in dollar amounts and in percentages of the portfolios at the dates indicated:

                                                       
          At December 31,
         
          2001   2000   1999
         
 
 
                  Percent           Percent           Percent
(Dollars in Thousands)   Amount   of Total   Amount   of Total   Amount   of Total

 
 
 
 
 
 
Securities available-for-sale:
                                               
 
Mortgage-backed securities:
                                               
   
GNMA pass-through certificates
  $ 74,675       2.10 %   $ 104,264       1.35 %   $ 125,701       1.42 %
   
FHLMC pass-through certificates
    133,247       3.75       189,368       2.46       226,414       2.55  
   
FNMA pass-through certificates
    254,826       7.18       369,709       4.80       447,505       5.05  
   
REMICs and CMOs:
                                               
     
Agency issuance
    1,402,093       39.51       4,954,148       64.31       5,869,778       66.23  
     
Non-agency issuance
    1,150,122       32.41       1,393,696       18.09       1,535,579       17.33  
 
Obligations of the U.S. Government and agencies
    359,561       10.13       499,568       6.49       474,204       5.35  
 
Corporate debt securities
    61,215       1.72       56,178       0.73       54,181       0.61  
 
FNMA and FHLMC preferred stock
    111,276       3.14       133,789       1.74       127,479       1.44  
 
Asset-backed and other securities
    2,168       0.06       2,502       0.03       1,908       0.02  
   
 
   
     
     
     
     
     
 
Total securities available-for-sale
  $ 3,549,183       100.00 %   $ 7,703,222       100.00 %   $ 8,862,749       100.00 %
   
 
   
     
     
     
     
     
 
Securities held-to-maturity:
                                               
 
Mortgage-backed securities:
                                               
   
GNMA pass-through certificates
  $ 2,470       0.06 %   $ 3,302       0.19 %   $ 4,247       0.22 %
   
FHLMC pass-through certificates
    24,906       0.56       34,955       2.04       45,287       2.38  
   
FNMA pass-through certificates
    9,244       0.21       11,490       0.67       13,083       0.69  
   
REMICs and CMOs:
                                               
     
Agency issuance
    2,979,357       66.74       517,626       30.23       667,249       35.12  
     
Non-agency issuance
    1,043,110       23.36       296,156       17.30       352,395       18.55  
 
Obligations of the U.S. Government and agencies
    362,034       8.11       804,659       47.00       772,584       40.67  
 
Obligations of states and political subdivisions
    42,807       0.96       44,003       2.57       45,112       2.37  
   
 
   
     
     
     
     
     
 
Total securities held-to-maturity
  $ 4,463,928       100.00 %   $ 1,712,191       100.00 %   $ 1,899,957       100.00 %
   
 
   
     
     
     
     
     
 

During the quarter ended June 30, 2001, we transferred agency REMIC and CMO securities with an amortized cost of $2.90 billion and a market value of $2.88 billion from available-for-sale to held-to-maturity. The net unrealized loss, which is being amortized over the life of the securities transferred, was $22.6 million at the date of the transfer and is included in the net unrealized loss on securities, net of taxes, in accumulated other comprehensive loss at December 31, 2001. The balance of the net unrealized loss on the securities transferred from available-for-sale to held-to-maturity totaled $15.7 million at December 31, 2001.

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The table below sets forth certain information regarding the amortized cost, estimated fair values, weighted average yields and contractual maturities of our federal funds sold and repurchase agreements, FHLB-NY stock and mortgage-backed and other securities available-for-sale and held-to-maturity portfolios at December 31, 2001.

                                                     
        One Year   One to   Five to
        or Less   Five Years   Ten Years
       
 
 
                Weighted           Weighted           Weighted
        Amortized   Average   Amortized   Average   Amortized   Average
(Dollars in Thousands)   Cost   Yield   Cost   Yield   Cost   Yield

 
 
 
 
 
 
Federal funds sold and repurchase agreements
  $ 1,309,164       1.43 %   $       %   $       %
 
   
             
             
         
FHLB-NY stock (1)(2)
  $       %   $       %   $       %
 
   
             
             
         
Mortgage-backed and other securities available-for-sale:
                                               
 
GNMA pass-through certificates
  $       %   $       %   $ 1,128       8.11 %
 
FHLMC pass-through certificates
                418       3.23       11,176       5.86  
 
FNMA pass-through certificates
    194       6.69       853       6.20       3,950       6.37  
 
REMICs and CMOs:
                                               
   
Agency issuance
                2,521       7.21       7,970       6.11  
   
Non-agency issuance
                            4,082       7.56  
 
Obligations of the U.S Government and agencies
    500       3.93       1,001       4.53       128       5.70  
 
Corporate debt securities
                            5,000       9.25  
 
Equity securities(1)(3)
                                   
 
Asset-backed and other securities
                1,000       6.18              
 
   
             
             
         
Total securities available-for-sale:
  $ 694       4.70 %   $ 5,793       6.13 %   $ 33,434       6.77 %
 
   
             
             
         
Mortgage-backed and other securities held-to-maturity:
                                               
 
GNMA pass-through certificates
  $ 22       9.88 %   $ 419       7.75 %   $ 702       9.53 %
 
FHLMC pass-through certificates
    4       8.37       564       6.70       7,407       8.26  
 
FNMA pass-through certificates
                128       9.31       1,029       7.16  
 
REMICs and CMOs:
                                               
   
Agency issuance
                13,916       6.22       17,647       6.68  
   
Non-agency issuance
                            19,148       6.87  
 
Obligations of the U.S Government and agencies
                                   
 
Obligations of states and political subdivisions
    1,896       3.85                          
 
   
             
             
         
Total securities held-to-maturity:
  $ 1,922       3.93 %   $ 15,027       6.31 %   $ 45,933       7.07 %
 
   
             
             
         

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                             
        More Than                        
        Ten Years   Total Securities
       
 
                Weighted           Estimated   Weighted
        Amortized   Average   Amortized   Fair   Average
(Dollars in Thousands)   Cost   Yield   Cost   Value   Yield

 
 
 
 
 
Federal funds sold and repurchase agreements
  $       %   $ 1,309,164     $ 1,309,164       1.43 %
 
   
             
     
         
FHLB-NY stock (1)(2)
  $ 250,450       5.20 %   $ 250,450     $ 250,450       5.20 %
 
   
             
     
         
Mortgage-backed and other securities available-for-sale:
                                       
 
GNMA pass-through certificates
  $ 70,863       6.90 %   $ 71,991     $ 74,675       6.91 %
 
FHLMC pass-through certificates
    118,833       6.36       130,427       133,247       6.31  
 
FNMA pass-through certificates
    243,327       6.44       248,324       254,826       6.44  
 
REMICs and CMOs:
                                       
   
Agency issuance
    1,391,750       5.68       1,402,241       1,402,093       5.69  
   
Non-agency issuance
    1,128,302       6.41       1,132,384       1,150,122       6.41  
 
Obligations of the U.S Government and agencies
    361,259       6.97       362,888       359,561       6.96  
 
Corporate debt securities
    61,126       7.95       66,126       61,215       8.05  
 
Equity securities(1)(3)
    120,115       5.24       120,115       111,376       5.24  
 
Asset-backed and other securities
    1,066       3.08       2,066       2,068       4.58  
 
   
             
     
         
Total securities available-for-sale:
  $ 3,496,641       6.17 %   $ 3,536,562     $ 3,549,183       6.18 %
 
   
             
     
         
Mortgage-backed and other securities held-to-maturity:
                                       
 
GNMA pass-through certificates
  $ 1,327       9.83 %   $ 2,470     $ 2,713       9.39 %
 
FHLMC pass-through certificates
    16,931       8.08       24,906       25,482       8.10  
 
FNMA pass-through certificates
    8,087       6.17       9,244       9,348       6.32  
 
REMICs and CMOs:
                                       
   
Agency issuance
    2,947,794       6.06       2,979,357       2,975,780       6.07  
   
Non-agency issuance
    1,023,962       6.06       1,043,110       1,049,426       6.08  
 
Obligations of the U.S Government and agencies
    362,034       7.30       362,034       362,628       7.30  
 
Obligations of states and political subdivisions
    40,911       6.53       42,807       42,823       6.42  
 
   
             
     
         
Total securities held-to-maturity:
  $ 4,401,046       6.18 %   $ 4,463,928     $ 4,468,200       6.19 %
 
   
             
     
         


(1)   As equity securities have no maturities, they are classified in the more than ten years category.
(2)   The carrying amount of FHLB-NY stock equals cost.
(3)   Equity securities include FNMA and FHLMC preferred stock which had an amortized cost of $120.0 million and a market value of $111.3 million at December 31, 2001.

25


Table of Contents

Loan Portfolio

Loan Portfolio Composition

The following table sets forth the composition of our loans receivable and loans held-for-sale portfolios in dollar amounts and in percentages of the portfolio at the dates indicated.

                                                                                   
      At December 31,
     
      2001   2000   1999   1998   1997
     
 
 
 
 
              Percent           Percent           Percent           Percent           Percent
              of           of           of           of           of
(Dollars in Thousands)   Amount   Total   Amount   Total   Amount   Total   Amount   Total   Amount   Total

 
 
 
 
 
 
 
 
 
 
Mortgage loans (gross) (1):
                                                                               
 
One-to-four family
  $ 10,146,555       83.63 %   $ 9,863,935       86.79 %   $ 9,018,270       88.05 %   $ 7,857,964       87.37 %   $ 6,904,114       86.37 %
 
Multi-family
    1,094,312       9.02       801,917       7.05       615,438       6.01       452,854       5.03       377,292       4.72  
 
Commercial real estate
    598,334       4.93       480,211       4.23       398,198       3.89       414,565       4.61       435,272       5.44  
 
Construction
    50,739       0.42       34,599       0.30       34,837       0.34       39,408       0.44       20,922       0.26  
 
   
     
     
     
     
     
     
     
     
     
 
Total mortgage loans
    11,889,940       98.00       11,180,662       98.37       10,066,743       98.29       8,764,791       97.45       7,737,600       96.79  
 
   
     
     
     
     
     
     
     
     
     
 
Consumer and other loans (gross)(2):
                                                                               
 
Home equity
    189,259       1.56       133,748       1.18       116,726       1.14       142,437       1.58       130,665       1.63  
 
Passbook
    9,012       0.07       8,710       0.08       7,481       0.07       6,653       0.07       7,207       0.09  
 
Home Improvement
    1,502       0.01       2,437       0.02       3,787       0.04       5,992       0.07       8,283       0.11  
 
Student
    1,898       0.02       2,154       0.02       2,780       0.03       4,118       0.05       13,212       0.17  
 
Line of Credit, Overdraft
    18,046       0.15       20,603       0.18       23,186       0.23       24,846       0.28       37,057       0.46  
 
Other (3)
    4,251       0.04       8,236       0.07       16,413       0.16       39,758       0.44       51,800       0.65  
 
Commercial
    18,124       0.15       8,822       0.08       4,531       0.04       5,573       0.06       8,136       0.10  
 
   
     
     
     
     
     
     
     
     
     
 
Total consumer and other loans
    242,092       2.00       184,710       1.63       174,904       1.71       229,377       2.55       256,360       3.21  
 
   
     
     
     
     
     
     
     
     
     
 
Total loans
    12,132,032       100.00 %     11,365,372       100.00 %     10,241,647       100.00 %     8,994,168       100.00 %     7,993,960       100.00 %
 
           
             
             
             
             
 
Net unamortized premiums and deferred loans costs
    78,619               72,622               58,803               32,463               26,638          
Allowance for loan losses
    (82,285 )             (79,931 )             (76,578 )             (74,403 )             (73,920 )        
 
   
             
             
             
             
         
Total loans, net
  $ 12,128,366             $ 11,358,063             $ 10,223,872             $ 8,952,228             $ 7,946,678          
 
   
             
             
             
             
         


(1)   Includes $41.5 million, $13.5 million, $11.4 million, $212.9 million, and $163.7 million of mortgage loans classified as held-for-sale at December 31, 2001, 2000, 1999, 1998, and 1997, respectively.
(2)   Includes $1.9 million, $2.2 million, $2.8 million, $4.1 million and $252,000 of student loans classified as held-for-sale at December 31, 2001, 2000, 1999, 1998 and 1997, respectively.
(3)   Includes automobile and personal unsecured loans.

26


Table of Contents

Loan Maturity, Repricing and Activity

The following table shows the maturities of our loans receivable at December 31, 2001 and does not reflect the effect of prepayments or scheduled principal amortization. The table does not include loans held-for-sale, which totaled $43.4 million at December 31, 2001.

                                                     
        At December 31, 2001
       
        One-to                           Consumer        
        -Four   Multi-   Commercial           and   Total Loans
(In Thousands)   Family   Family   Real Estate   Construction   Other   Receivable

 
 
 
 
 
 
Amount due:
                                               
 
Within one year
  $ 15,826     $ 9,964     $ 33,828     $ 33,173     $ 23,746     $ 116,537  
 
After one year:
                                               
   
One to three years
    22,686       7,851       27,272       17,566       21,318       96,693  
   
Three to five years
    38,872       13,022       29,055             9,709       90,658  
   
Five to ten years
    511,751       402,075       271,628             9,060       1,194,514  
   
Ten to twenty years
    1,653,369       596,243       229,561             33,312       2,512,485  
   
Over twenty years
    7,862,559       65,157       6,990             143,049       8,077,755  
 
   
     
     
     
     
     
 
 
Total due after one year
    10,089,237       1,084,348       564,506       17,566       216,448       11,972,105  
 
   
     
     
     
     
     
 
Total amount due
  $ 10,105,063     $ 1,094,312     $ 598,334     $ 50,739     $ 240,194       12,088,642  
 
   
     
     
     
     
         
 
Net unamortized premiums and deferred loan costs
                                            78,619  
 
Allowance for loan losses
                                            (82,285 )
 
                                           
 
Loans receivable, net
                                          $ 12,084,976  
 
                                           
 

The following table sets forth at December 31, 2001, the dollar amount of all loans receivable due after December 31, 2002, and whether such loans have fixed interest rates or adjustable interest rates.

                           
      Due After December 31, 2002
     
(In Thousands)   Fixed   Adjustable   Total

 
 
 
Mortgage loans:
                       
 
One-to-four family
  $ 2,093,365     $ 7,995,872     $ 10,089,237  
 
Multi-family
    316,600       767,748       1,084,348  
 
Commercial real estate
    151,534       412,972       564,506  
 
Construction
          17,566       17,566  
Consumer and other loans
    38,666       177,782       216,448  
 
 
   
     
     
 
Total
  $ 2,600,165     $ 9,371,940     $ 11,972,105  
 
 
   
     
     
 

27


Table of Contents

The following table sets forth our loan originations, purchases, sales and principal repayments for the periods indicated:

                               
          For the Year Ended December 31,
         
(In Thousands)   2001   2000   1999

 
 
 
Mortgage loans (gross) (1):
                       
 
At beginning of year
  $ 11,180,662     $ 10,066,743     $ 8,764,791  
   
Mortgage loans originated:
                       
     
One-to-four family
    2,510,227       1,533,299       2,986,529  
     
Multi-family
    413,518       204,948       231,740  
     
Commercial real estate
    178,246       109,533       82,071  
     
Construction
    29,187       43,449       38,565  
 
   
     
     
 
   
Total mortgage loans originated
    3,131,178       1,891,229       3,338,905  
 
   
     
     
 
   
Purchases of mortgage loans:
                       
     
Third party loan origination program (2)
    1,427,099       836,782       417,641  
   
Sales of mortgage loans
    (379,929 )     (125,086 )     (490,687 )
   
Transfer of loans to REO
    (5,420 )     (8,146 )     (10,580 )
   
Principal repayments
    (3,462,677 )     (1,480,354 )     (1,951,994 )
   
Loans charged off
    (973 )     (506 )     (1,333 )
 
   
     
     
 
 
At end of year
  $ 11,889,940     $ 11,180,662     $ 10,066,743  
 
   
     
     
 
Consumer and other loans (gross) (3):
                       
 
At beginning of year
  $ 184,710     $ 174,904     $ 229,377  
   
Consumer and other loans originated
    178,682       118,286       72,938  
   
Sales of consumer and other loans
    (4,061 )     (5,261 )     (7,357 )
   
Principal repayments
    (115,685 )     (101,541 )     (115,756 )
   
Loans charged off
    (1,554 )     (1,678 )     (4,298 )
 
   
     
     
 
 
At end of year
  $ 242,092     $ 184,710     $ 174,904  
 
   
     
     
 


(1)   Includes $41.5 million, $13.5 million, and $11.4 million of mortgage loans classified as held-for-sale at December 31, 2001, 2000, and 1999, respectively.
(2)   Third party loan originations for the years ended December 31, 2001, 2000 and 1999 were predominantly secured by one-to-four family properties.
(3)   Includes $1.9 million, $2.2 million, and $2.8 million of student loans classified as held-for-sale at December 31, 2001, 2000, and 1999, respectively.

28


Table of Contents

Delinquent Loans and Classified Assets

Information regarding delinquent loans and non-performing assets appears under Item 7, “MD&A.”

The following table sets forth our carrying value of the assets, exclusive of general valuation allowances, classified as special mention, substandard or doubtful at December 31, 2001:

                                                     
        Special Mention   Substandard   Doubtful
       
 
 
(Dollars in Thousands)   Number   Amount   Number   Amount   Number   Amount

 
 
 
 
 
 
Loans:
                                               
 
One-to-four family
        $       212     $ 32,179       4     $ 319  
 
Multi-family
                16       4,205              
 
Commercial real estate
    5       10,158       13       9,893              
 
Construction
                            1       522  
 
Consumer and other loans
                104       991              
 
 
   
     
     
     
     
     
 
   
Total loans
    5       10,158       345       47,268       5       841  
 
 
   
     
     
     
     
     
 
Real estate owned:
                                               
 
One-to-four family
                22       2,405              
 
Multi-family
                1       582              
 
 
   
     
     
     
     
     
 
   
Total real estate owned
                23       2,987              
 
 
   
     
     
     
     
     
 
 
    5     $ 10,158       368     $ 50,255       5     $ 841  
 
 
   
     
     
     
     
     
 

Note: There were no assets classified as loss at December 31, 2001.

Deposits

The following table presents our deposit activity for the years indicated:

                         
    For the Year Ended December 31,
   
(Dollars in Thousands)   2001   2000   1999

 
 
 
Opening balance
  $ 10,071,687     $ 9,554,534     $ 9,668,286  
Net deposits (withdrawals)
    432,017       107,052       (320,467 )
Interest credited
    399,989       410,101       363,156  
Sale of upstate New York banking offices (1)
                (156,441 )
 
   
     
     
 
Ending balance
  $ 10,903,693     $ 10,071,687     $ 9,554,534  
 
   
     
     
 
Net increase (decrease)
  $ 832,006     $ 517,153     $ (113,752 )
 
   
     
     
 
Percentage increase (decrease)
    8.26 %     5.41 %     (1.18 )%


(1)   Five upstate New York banking offices were sold in 1999 with deposits totaling $156.4 million for a net gain of $20.4 million.

29


Table of Contents

The following table sets forth the maturity periods of our certificates of deposit in amounts of $100,000 or more at December 31, 2001.

         
Maturity Period   Amount

 
    (In Thousands)
 
       
Three months or less
  $ 248,719  
Over three through six months
    146,736  
Over six through twelve months
    107,506  
Over twelve months
    335,032  
 
   
 
Total
  $ 837,993  
 
   
 

The following table sets forth the distribution of our average deposit balances for the periods indicated and the weighted average nominal interest rates on each category of deposit presented.

                                                   
      For the Year Ended December 31,
     
      2001   2000
     
 
                      Weighted                   Weighted
              Percent   Average           Percent   Average
      Average   of Total   Nominal   Average   of Total   Nominal
(Dollars in Thousands)   Balance   Deposits   Rate   Balance   Deposits   Rate

 
 
 
 
 
 
Savings
  $ 2,495,532       23.70 %     1.83 %   $ 2,529,448       25.88 %     2.00 %
Money market
    1,734,232       16.47       3.71       1,337,754       13.68       5.19  
NOW
    599,919       5.70       0.85       548,022       5.61       1.00  
Non-interest bearing NOW
    475,605       4.52             391,693       4.01        
 
   
     
             
     
     
 
Total
    5,305,288       50.39       2.17       4,806,917       49.18       2.61  
 
   
     
             
     
     
 
Certificates of deposit (1):
                                               
 
Within one year
    1,698,436       16.13       4.23       1,788,655       18.30       5.08  
 
One to three years
    1,769,563       16.81       5.61       1,616,331       16.53       5.45  
 
Three to five years
    1,410,231       13.39       6.08       1,340,468       13.71       6.13  
 
Five or more years
    94,409       0.90       6.61       71,504       0.73       6.62  
 
Jumbo
    250,524       2.38       5.01       151,193       1.55       5.56  
 
   
     
             
     
         
Total
    5,223,163       49.61       5.28       4,968,151       50.82       5.52  
 
   
     
             
     
         
Total deposits
  $ 10,528,451       100.00 %     3.71 %   $ 9,775,068       100.00 %     4.09 %
 
   
     
             
     
         

[Additional columns below]

[Continued from above table, first column(s) repeated]
                           
For the Year Ended December 31,

      1999
     
                      Weighted
              Percent   Average
      Average   of Total   Nominal
(Dollars in Thousands)   Balance   Deposits   Rate

 
 
 
Savings
  $ 2,697,726       28.19 %     2.00 %
Money market
    1,038,765       10.86       4.27  
NOW
    516,010       5.39       1.00  
Non-interest bearing NOW
    372,359       3.89        
 
   
     
         
Total
    4,624,860       48.33       2.24  
 
   
     
         
Certificates of deposit (1):
                       
 
Within one year
    2,030,613       21.22       4.50  
 
One to three years
    1,624,501       16.98       5.24  
 
Three to five years
    1,108,682       11.59       6.04  
 
Five or more years
    64,692       0.68       5.87  
 
Jumbo
    115,184       1.20       4.49  
 
   
     
         
Total
    4,943,672       51.67       5.10  
 
   
     
         
Total deposits
  $ 9,568,532       100.00 %     3.72 %
 
   
     
         


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

The following table presents, by rate categories, the remaining periods to maturity of our certificates of deposit outstanding at December 31, 2001 and the balances of our certificates of deposit outstanding at December 31, 2001, 2000 and 1999:

                                           
      Period to maturity from December 31, 2001       At December 31,
     
   
      Within   One to two   Two to three   Over three        
(In Thousands)   one year   years   years   Years   2001

 
 
 
 
 
Certificates of deposit:
                                       
 
3.99% or less
  $ 1,169,083     $ 126,704     $ 35,190     $ 8,432     $ 1,339,409  
 
4.00% to 4.99%
    620,049       200,965       121,243       94,897       1,037,154  
 
5.00% to 5.99%
    308,331       289,726       89,135       260,373       947,565  
 
6.00% to 6.99%
    949,093       185,765       226,120       470,559       1,831,537  
 
7.00% and over
                      4,633       4,633  
 
 
   
     
     
     
     
 
Total
  $ 3,046,556     $ 803,160     $ 471,688     $ 838,894     $ 5,160,298  
 
 
   
     
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
                   
      At December 31,
     
(In Thousands)   2000   1999

 
 
Certificates of deposit:
               
 
3.99% or less
  $ 150,043     $ 287,739  
 
4.00% to 4.99%
    127,422       1,057,652  
 
5.00% to 5.99%
    2,589,393       2,526,491  
 
6.00% to 6.99%
    2,134,632       954,287  
 
7.00% and over
    148,245       103,474  
 
 
   
     
 
Total
  $ 5,149,735     $ 4,929,643  
 
 
   
     
 

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Borrowings

For information regarding our borrowings outstanding, average borrowings, maximum borrowings and weighted average interest rates at and for each of the years ended December 31, 2001, 2000 and 1999, see Note 8 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

Item 2. PROPERTIES

At December 31, 2001 we operated 86 full-service banking offices, of which 50 were owned and 36 were leased. At December 31, 2001, we owned our principal executive office and the office for our mortgage operations, both located in Lake Success, New York. We believe such facilities are suitable and adequate for our operational needs.

For further information regarding our obligations, see Note 12 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

At December 31, 2001, we leased our previous mortgage operating facility in Mineola, New York which we no longer occupy. Approximately two-thirds of this facility was sublet at December 31, 2001.

Item 3. LEGAL PROCEEDINGS

The Weil Litigation

On March 24, 1994, our predecessor, The Long Island Savings Bank, FSB, or LISB, received notice that it had been named as a defendant in a class action lawsuit filed in the United States District Court for the Eastern District of New York. Other defendants included James J. Conway, Jr., former Chairman and Chief Executive Officer of LISB who resigned from LISB in June 1992, his former law firm, certain predecessor firms of that law firm and certain partners of that law firm. The lawsuit is entitled Ronnie Weil also known as Ronnie Moore, for Herself and on behalf of All Other Persons Who Obtained Mortgage Loans from The Long Island Savings Bank, FSB during the period January 1, 1983 through December 31, 1992 vs. The Long Island Savings Bank, FSB, et al., or the Weil Litigation. The complaint alleged that the Defendants caused mortgage loan commitments to be issued to mortgage loan borrowers, submitted legal invoices to the borrowers at the closing of mortgage loans which falsely represented the true legal fees charged for representing LISB in connection with the mortgage loans and failed to advise that a part of the listed legal fee would be paid to Mr. Conway. The complaint did not specify the amount of damages sought.

On or about June 9, 1994, LISB was served with an Amended Summons and Amended Complaint adding LISB’s directors as individual defendants. On January 4, 1999, we were served with a second amended complaint alleging essentially the same claims and adding as additional defendants, us, as successor to LISB, and certain members of James J. Conway, Jr.’s family. The second amended complaint sought damages of at least $11.0 million, trebled. We, LISB and the former LISB directors, as well as the other Defendants remaining in the Weil Litigation, answered the second amended complaint and denied all allegations of wrongdoing.

By order dated May 7, 2001, the Court granted Plaintiffs’ Motion to Certify the Weil Litigation as a class action and certified a class of approximately 36,000 members consisting of all persons who obtained mortgage loans from LISB during the period January 1, 1983 through December 31, 1992 and paid LISB’s attorneys’ fees in connection with such mortgages.

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Thereafter, fact discovery was concluded in this matter and expert discovery was undertaken.

On November 7, 2001, all parties to the Weil Litigation, except Mr. Conway, entered into a Stipulation of settlement which, subject to the approval of the Court, provided for the dismissal of all claims alleged against all of the Defendants, including us. On November 13, 2001, the Court ordered that notice of the proposed settlement be mailed to the class members. Pursuant to the terms of the settlement, notice of the proposed settlement was also published over a two week period in several newspapers of general circulation in the area in which LISB originated mortgage loans with the class members.

On December 21, 2001, the Court held a hearing to determine if the proposed settlement was fair, adequate and reasonable and to hear objections, if any, from class members or other interested parties. By order dated January 16, 2002, the Court approved the settlement. The precise amount of the settlement cannot be determined at this time. We have, pursuant to the settlement, agreed to pay (1) Court approved costs and attorneys’ fees to Plaintiffs’ counsel in the aggregate amount of $5.4 million; (2) incentive awards to the named Plaintiffs in the aggregate amount of $65,000; (3) upon approval of the Court, the costs and fees of the Claims Administrator, of which we have advanced to date the sum of $200,000 and (4) the approved claims of class members who file proofs of claim on or before June 30, 2002. Under the settlement, our total liability for all of the foregoing will not exceed $15.0 million.

Based upon amounts previously accrued and applicable directors’ and officers’ liability insurance, we do not expect the settlement and its funding to have a material adverse effect on our results of operations or our financial condition.

By letter dated January 14, 2002, we received a demand for indemnification on behalf of Mr. James J. Conway, Jr. in the amount of $4.5 million regarding costs and attorneys’ fees he claims to have incurred in connection with four legal proceedings, including the Weil Litigation, which arise from the circumstances underlying the Weil Litigation. At our Board of Directors meetings held on February 20, 2002, our Boards of Directors determined that Mr. Conway had not met the criteria for permissive indemnification under the applicable OTS regulation and, therefore, we have denied his indemnification request.

Supervisory Goodwill Litigation

On August 15, 1989, LISB, and its former wholly owned subsidiary, The Long Island Savings Bank of Centereach, FSB, or Centereach, filed suit against the United States seeking damages and/or other appropriate relief on the grounds, among others, that the United States, or the Government, had breached the terms of the 1983 Assistance Agreement between LISB and the Federal Savings and Loan Insurance Corporation pursuant to which LISB acquired Centereach, or the Assistance Agreement. The Assistance Agreement, among other things, provided for the inclusion of supervisory goodwill as an asset on Centereach’s balance sheet to be included in capital and amortized over 40 years for regulatory purposes. The suit is pending in the United States Court of Federal Claims and is entitled The Long Island Savings Bank, FSB. et al. vs. The United States, or the LISB Goodwill Litigation.

Similarly, on July 21, 1995, we commenced an action entitled Astoria Federal Savings and Loan Association vs. United States, or the Astoria Goodwill Litigation, in the United States Court of Federal Claims against the Government seeking in excess of $250.0 million in damages arising from the Government’s breach of an assistance agreement entered into by our predecessor in interest, Fidelity, in connection with its acquisition in October 1984 of Suburbia Federal Savings and Loan Association and the Government’s subsequent enactment and implementation of the Financial Institutions Reform, Recovery and Enforcement Act, or FIRREA, in 1989. In addition to a breach of contract claim, our complaint also asserted claims based on promissory estoppel, failure of consideration and frustration of

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purpose, and a taking of our property without just compensation in violation of the Fifth Amendment to the United States Constitution.

Initially, both the LISB Goodwill Litigation and the Astoria Goodwill Litigation were stayed pending disposition by the United States Supreme Court of three related supervisory goodwill cases, or the Winstar Cases. On July 1, 1996, the Supreme Court ruled in the Winstar Cases that the Government had breached its contracts in the Winstar Cases, was liable in damages for those breaches and remanded the cases to the United States Court of Federal Claims to determine the extent of such damages.

On November 1, 1996, LISB filed a motion for partial summary judgment against the Government on the issues of whether LISB had a contract with the Government and whether the enactment of FIRREA was contrary to the terms of such contract. The Government contested such motion and cross-moved for summary judgment seeking to dismiss LISB’s contract claims. Subsequently, the Government moved to dismiss Counts II through V of the complaint in the LISB Goodwill Litigation, which are based on breach of implied contract, promissory estoppel, failure of consideration and frustration of purpose, and takings under the Fifth Amendment of the United States Constitution.

On November 6, 1996, we also moved for partial summary judgment against the Government on the issues of whether Fidelity had a contract with the Government and whether the enactment of FIRREA was contrary to the terms of such contract. The Government contested such motion and cross-moved for summary judgment seeking to dismiss our contract claims in that case as well. Our motion for partial summary judgment remains pending before the Court.

During 1999 and 2000, the parties in the LISB Goodwill Litigation conducted, and completed, fact and expert discovery. However, as a result of recent appellate decisions rendered by the United States Court of Appeals for the Federal Circuit and decisions of the Court of Federal Claims related to other Winstar-related cases, we have requested permission of the Court to file supplemental expert reports regarding damages. That request is pending.

In November 2000, the LISB Goodwill Litigation was transferred to Senior Judge Lawrence S. Margolis. Judge Margolis presided over the trial in the Winstar case entitled Bobby J. Glass, et al. and the Federal Deposit Insurance Corp. vs. The United States, Index No. 92-428C.

On February 8, 2001, the Government served its answer to our complaint in the LISB Goodwill Litigation. In its answer, the Government denies our claims and asserts a number of affirmative defenses. In addition, the Government asserted two counterclaims: (1) that our claim should be forfeited pursuant to 28 U.S.C. §2514 and (2) that because the Government alleges that the Assistance Agreement with the Government are void or voidable the Government should be entitled to restitution of $122.2 million in the aggregate. The Government bases its counterclaims on the same factual allegations contained in the Weil Litigation.

Following oral argument, on April 10, 2001, on our motion for partial summary judgment and the Government’s cross-motions for partial summary judgment, Judge Margolis entered orders (1) denying our motion on contract liability issues on the basis that there are genuine issues of material fact with respect to our breach of contract claim and (2) granting, in part, and denying, in part, the Government’s cross-motion. The Court denied the Government’s motion to dismiss those counts of the complaint based upon breach of express contract, takings under the Fifth Amendment of the United States Constitution, and the right to pre-judgment interest arising from a taking under the Fifth Amendment. The Court granted the Government’s motion to dismiss as to those counts of the complaint which were based on breach of an implied contract, failure of consideration and frustration of purpose. Accordingly, our breach of contract claim and our takings claim remain outstanding.

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On April 4, 2001, the Government moved for summary judgment on its counterclaims. On May 1, 2001, we filed an opposition and cross-motion for summary judgment dismissing the counterclaims and related affirmative defenses. In our opposition, we requested the disclosure of certain documents and the right to depose the Government’s sole fact witness whose declaration was submitted in support of its motion. The Court allowed such discovery. Supplemental memoranda were filed by the parties on the motion and cross-motion in December 2001.

On February 26, 2002, the Court heard oral argument on the Government’s motion for summary judgment on its counterclaims and on our cross-motion for summary judgment dismissing the counterclaims and related affirmative defenses. Following argument, the Court reserved decision, and noted that it may take the Court a considerable length of time to rule on the motions in view of their complexity and the number and length of the pleadings and exhibits filed by both sides.

On October 10, 2000, the Government moved to dismiss various portions of our complaint in the Astoria Goodwill Litigation, specifically those relating to promissory estoppel, failure of consideration and frustration of purpose and the Fifth Amendment Taking. The Government in such motion also requested dismissal of our motion for partial summary judgment referenced above alleging that we bore the risk of any regulatory changes with respect to the capital credits and that we are not entitled to interest. We have contested such motion.

The Astoria Goodwill Litigation has been designated as one of the “second-thirty” cases. As a result, discovery in such case commenced on August 23, 1999. Fact witness discovery has been concluded. However, expert discovery was stayed until 30 days following the filing of a decision in the appeal before the United States Court of Appeals for the Federal Circuit of the decision rendered in the Court of Federal Claims in the case of California Federal Bank v. United States of America, Case No. 92-138C. The United States Court of Appeals for the Federal Circuit issued its opinion in such case on April 3, 2001. Accordingly, expert discovery resumed in the Astoria Goodwill Litigation on or about May 3, 2001. Expert discovery is scheduled to be completed on or before April 17, 2002.

Effective February 1, 2002, the Astoria Goodwill Litigation was assigned to Judge Lynn Bush. It does not appear that Judge Bush has had any previous experience in the Winstar-related supervisory goodwill cases.

Based upon our review of the decisions rendered to date in the Winstar-related supervisory goodwill cases previously or currently pending before the United States Court of Federal Claim, we are unable to predict with any degree of certainty the outcome of our claims against the Government and the amount of damages that may be awarded in connection with either the LISB Goodwill Litigation or the Astoria Goodwill Litigation, if any. No assurance can be given as to the results of these claims or the timing of any proceedings in relation thereto.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during the quarter ended December 31, 2001 to a vote of our security holders through the solicitation of proxies or otherwise.

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PART II

Item 5. MARKET FOR ASTORIA FINANCIAL CORPORATION’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

Our common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol “ASFC.” The table below shows the reported high and low closing price of our common stock during the periods indicated in 2001 and 2000, as adjusted for the two-for-one common stock split on December 3, 2001.

                                 
    2001   2000
   
 
    High   Low   High   Low
   
 
 
 
First Quarter
  $ 28.56     $ 24.28     $ 14.91     $ 11.07  
Second Quarter
    29.15       25.88       15.38       12.50  
Third Quarter
    31.50       27.30       19.53       13.19  
Fourth Quarter
    30.50       24.66       27.22       16.28  

As of March 15, 2002, we had 3,993 shareholders of record. As of December 31, 2001, there were 90,766,744 shares of common stock outstanding.

The following schedule summarizes the cash dividends paid per common share for 2001 and 2000, as adjusted for the two-for-one common stock split on December 3, 2001:

                 
    2001   2000
   
 
First Quarter
  $ 0.13     $ 0.12  
Second Quarter
    0.155       0.13  
Third Quarter
    0.155       0.13  
Fourth Quarter
    0.17       0.13  

On January 23, 2002, our Board of Directors declared a quarterly cash dividend of $0.17 per common share, payable on March 1, 2002, to common stockholders of record at the close of business on February 15, 2002. Our Board of Directors intends to review the payment of dividends quarterly and plans to continue to maintain a regular quarterly dividend in the future, dependent upon our earnings, financial condition and other factors.

We are subject to the laws of the State of Delaware which generally limit dividends to an amount equal to the excess of our net assets (the amount by which total assets exceed total liabilities) over our statutory capital, or if there is no such excess, to our net profits for the current and/or immediately preceding fiscal year. Our payment of dividends is dependent, in large part, upon receipt of dividends from Astoria Federal. Astoria Federal is subject to certain restrictions which may limit its ability to pay us dividends. See Item 1, “Business — Regulation and Supervision” and Note 10 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data” for an explanation of the impact of the liquidation accounts and regulatory capital requirements on Astoria Federal’s ability to pay dividends. See Item 1, “Business — Federal Taxation” and Note 13 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data” for an explanation of the tax impact of (1) distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes; (2) distributions in redemption of stock; and (3) distribution in partial or complete liquidation.

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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)   2001   2000   1999   1998   1997

 
 
 
 
 
Selected Financial Data:
                                       
Total assets
  $ 22,667,706     $ 22,336,802     $ 22,696,536     $ 20,587,741     $ 16,432,337  
Federal funds sold and repurchase agreements
    1,309,164       171,525       335,653       266,437       110,550  
Mortgage-backed and other securities available-for-sale
    3,549,183       7,703,222       8,862,749       8,196,444       4,807,305  
Mortgage backed and other securities held-to-maturity
    4,463,928       1,712,191       1,899,957       2,108,811       2,632,672  
Loans held-for-sale
    43,390       15,699       14,156       217,027       163,962  
Loans receivable, net
    12,084,976       11,342,364       10,209,716       8,735,201       7,782,716  
Mortgage servicing rights, net
    35,295       40,962       48,369       50,237       41,789  
Deposits
    10,903,693       10,071,687       9,554,534       9,668,286       9,951,421  
Borrowed funds
    9,698,587       10,197,371       11,401,521       9,022,797       4,774,237  
Capital trust securities
    125,000       125,000       125,000              
Stockholders’ equity
    1,542,586       1,513,163       1,196,912       1,462,384       1,445,799  
                                           
              For the Year Ended December 31,        
             
       
(In Thousands, Except Per Share Data)   2001   2000   1999   1998   1997

 
 
 
 
 
Selected Operating Data:
                                       
Interest income
  $ 1,438,563     $ 1,517,934     $ 1,495,279     $ 1,224,448     $ 978,155  
Interest expense
    969,189       1,010,918       955,331       775,465       603,591  
 
   
     
     
     
     
 
Net interest income
    469,374       507,016       539,948       448,983       374,564  
Provision for loan losses
    4,028       4,014       4,119       15,380       9,061  
 
   
     
     
     
     
 
Net interest income after provision for loan losses
    465,346       503,002       535,829       433,603       365,503  
Non-interest income
    100,974       77,753       92,483       78,532       70,035  
Non-interest expense:
                                       
 
General and administrative
    176,407       181,242       195,080       232,769       215,642  
 
Net amortization of mortgage servicing rights
    10,869       8,507       5,787       16,269       7,349  
 
Goodwill litigation
    2,196       8,580       6,417       1,665       1,101  
 
Capital trust securities
    12,416       12,435       2,169              
 
Amortization of goodwill
    19,242       19,296       19,425       19,754       11,722  
 
Acquisition costs and restructuring charges
                      124,168        
 
   
     
     
     
     
 
Total non-interest expense
    221,130       230,060       228,878       394,625       235,814  
 
   
     
     
     
     
 
Income before income tax expense, extraordinary item and cumulative effect of accounting change
    345,190       350,695       399,434       117,510       199,724  
Income tax expense
    120,036       134,146       163,764       61,825       81,840  
 
   
     
     
     
     
 
Income before extraordinary item and cumulative effect of accounting change
    225,154       216,549       235,670       55,685       117,884  
Extraordinary item, net of tax
                      (10,637 )      
Cumulative effect of accounting change, net of tax
    (2,294 )                        
 
   
     
     
     
     
 
Net income
    222,860       216,549       235,670       45,048       117,884  
Preferred dividends declared
    6,000       6,000       6,000       6,000       1,500  
 
   
     
     
     
     
 
Net income available to common shareholders
  $ 216,860     $ 210,549     $ 229,670     $ 39,048     $ 116,384  
 
   
     
     
     
     
 
Basic earnings per common share (1)
  $ 2.40     $ 2.20     $ 2.24     $ 0.38     $ 1.26  
Diluted earnings per common share (1)
  $ 2.35     $ 2.16     $ 2.19     $ 0.37     $ 1.19  


(1)   Per share data has been adjusted to reflect the two-for-one common stock split in the form of a 100% stock dividend on December 3, 2001.

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    At or For the Year Ended December 31,        
   
       
    2001   2000   1999   1998 1997  
   
 
 
 

 
Selected Financial Ratios and Other Data:
                                       
Return on average assets
    0.99 %     0.97 %     1.04 %     0.25 %     0.84 %
Return on average stockholders’ equity
    14.13       16.70       17.31       3.02       9.83  
Return on average tangible stockholders’ equity
    16.13       20.02       20.92       3.65       11.16  
Average stockholders’ equity to average assets
    7.01       5.81       5.99       8.13       8.56  
Average tangible stockholders’ equity to average tangible assets
    6.19       4.89       5.01       6.83       7.62  
Stockholders’ equity to total assets
    6.81       6.77       5.27       7.10       8.80  
Core deposits to total deposits (1)
    52.67       48.87       48.41       47.84       43.40  
Net interest rate spread
    1.94       2.01       2.23       2.32       2.49  
Net interest margin
    2.18       2.32       2.46       2.58       2.78  
General and administrative expense to average assets
    0.78       0.81       0.86       1.27       1.54  
Efficiency ratio (2)
    30.93       31.21       31.88       45.07       50.13  
Average interest-earning assets to average interest-bearing liabilities
    1.05 x       1.07 x       1.05 x       1.06 x       1.07 x  
Book value per common share (3)
  $ 16.44     $ 14.74     $ 11.09     $ 12.92     $ 12.97  
Tangible book value per common share (3)
    14.40       12.68       8.92       10.67       10.52  
Cash dividends paid per common share (3)
    0.61       0.51       0.48       0.40       0.28  
Dividend payout ratio (3)
    25.96 %     23.61 %     21.92 %     108.11 %     23.53 %
Asset Quality Ratios:
                                       
Non-performing loans to total loans (4)
    0.31       0.32       0.52       1.26       1.14  
Non-performing loans to total assets (4)
    0.16       0.16       0.24       0.54       0.55  
Non-performing assets to total assets (4)(5)
    0.18       0.18       0.26       0.58       0.70  
Allowance for loan losses to non-performing loans
    221.70       220.88       143.49       66.99       82.23  
Allowance for loan losses to non-accrual loans
    229.60       226.85       151.77       70.00       86.79  
Allowance for loan losses to total loans
    0.68       0.70       0.74       0.84       0.94  
Other Data:
                                       
Number of deposit accounts
    985,473       972,777       952,514       980,307       1,044,390  
Mortgage loans serviced for others (in thousands)
  $ 3,322,087     $ 3,929,483     $ 4,414,684     $ 4,944,176     $ 4,690,746  
Number of full service banking offices
    86       86       87       96       96  
Regional lending offices
    1       1       1       12       22  
Full time equivalent employees
    1,885       1,862       1,914       1,987       2,664  
Non-GAAP Disclosures (6)
                                       
Operating return on average assets
    1.00 %     0.97 %     0.99 %     0.79 %     0.84 %
Operating cash return on average assets (7)
    1.12       1.09       1.13       1.05       1.09  
Operating return on average stockholders’ equity
    14.27       16.77       16.48       9.76       9.83  
Operating cash return on average stockholders’ equity (7)
    16.00       18.76       18.92       12.86       12.77  
Operating return on average tangible stockholders’ equity
    16.29       20.10       19.91       11.78       11.16  
Operating cash return on average tangible stockholders’ equity (7)
    18.26       22.48       22.86       15.53       14.49  
Operating non-interest income to average assets (8)
    0.45       0.33       0.32       0.37       0.40  
Operating cash general and administrative expense to average assets (9)
    0.75       0.76       0.82       1.17       1.40  
Operating cash efficiency ratio (2)(9)
    29.53       29.17       30.26       41.54       45.63  


(1)   Core deposits are comprised of savings, money market, NOW and demand deposit accounts.
(2)   Efficiency ratio represents general and administrative expense divided by the sum of net interest income plus non-interest income less net gain on sales of securities, premises and equipment, and the net gain on the disposition of banking offices.
(3)   Per share and related data have been adjusted to reflect the two-for-one common stock split in the form of a 100% stock dividend on December 3, 2001.
(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 payments and exclude loans which have been restructured and are accruing and performing in accordance with the restructured terms. Restructured accruing loans totaled $5.4 million, $5.2 million, $6.7 million, $6.9 million and $9.1 million at December 31, 2001, 2000, 1999, 1998, and 1997, respectively.
(5)   Non-performing assets consist of all non-performing loans, real estate owned and non-performing investments in real estate, net.
(6)   The information presented represents pro forma calculations which are not in conformity with GAAP. The following items have been excluded from the calculations: For 2001, $2.3 million, after tax, charge for the cumulative effect of an accounting change. For 2000, $3.4 million, after tax, charge for an executive severance payment ($5.4 million, before tax, for the efficiency and general and administrative expense to average assets ratios), offset by $2.5 million, after tax, for net gain on the disposition of banking offices. For 1999, $11.3 million, after tax, for net gain on the disposition of banking offices. For 1998, $100.3 million, after tax, for costs associated with the acquisition of Long Island Bancorp, Inc. and other infrequently occurring charges. See “Operating Earnings and Operating Cash Earnings” on page 60 for further discussion of these pro forma calculations.
(7)   Excludes non-cash charge for amortization of goodwill and amortization relating to employee stock plans and related tax benefit.
(8)   Operating non-interest income represents total non-interest income less net gain on sales of securities, premises and equipment, and the net gain on disposition of banking offices. Operating non-interest income totaled $101.0 million, $73.8 million, $72.0 million, $67.5 million and $55.6 million for 2001, 2000, 1999, 1998 and 1997, respectively.
(9)   Excludes non-cash charge for amortization relating to employee stock plans.

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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.

General

We are headquartered in Lake Success, New York and our principal business consists of the operation of our wholly-owned subsidiary, Astoria Federal. Astoria Federal’s primary business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities, and borrowed funds, primarily in one-to-four family mortgage loans, mortgage-backed securities and, to a lesser extent, multi-family mortgage loans and commercial real estate loans. To a much smaller degree we also invest in construction loans and consumer and other loans. In addition, Astoria Federal invests in securities issued by the U.S. Government and federal agencies and other securities.

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. General and administrative expense consists of compensation and benefits, occupancy, equipment and systems expense, federal deposit insurance premiums, advertising and other operating expenses. Other non-interest expense consists of net amortization of mortgage servicing rights, goodwill litigation expense, capital trust securities expense and amortization of goodwill. Our earnings are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates and U.S. Treasury yield curves, government policies and actions of regulatory authorities.

In addition to Astoria Federal, we have two other wholly-owned subsidiaries, AF Insurance Agency, Inc. and Astoria Capital Trust I. AF Insurance Agency, Inc. is a life insurance and variable annuity agent and property and casualty insurance broker. Through contractual agreements with The Treiber Group, LLC and IFS Agencies, Inc., AF Insurance Agency, Inc. provides insurance products to the customers of Astoria Federal. See “Liquidity and Capital Resources” for a discussion of Astoria Capital Trust I.

Liquidity and Capital Resources

Our primary source of funds is cash provided by principal and interest payments on loans and mortgage-backed and other securities. Principal payments on loans and mortgage-backed securities and proceeds from maturities of other securities totaled $7.28 billion for the year ended December 31, 2001 and $3.40 billion for the year ended December 31, 2000. The increase in loan and security repayments was primarily the result of the increase in mortgage loan refinance activity due to the lower interest rate environment during the year ended December 31, 2001. Net cash provided by operating activities totaled $222.2 million during the year ended December 31, 2001 and $231.0 million during the year ended December 31, 2000. During the year ended December 31, 2001, net borrowings decreased $498.8 million, while net deposits increased $832.0 million. During the year ended December 31, 2000, net borrowings decreased $1.20 billion, while net deposits increased $517.2 million. The changes in borrowings and deposits are consistent with our strategy of repositioning the balance sheet through, in part, a shift in our liability mix toward lower costing and less interest rate sensitive core deposits. The net increases in deposits for the year ended December 31, 2001 and 2000 reflect our continued emphasis on attracting customer deposits through competitive rates and product offerings.

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Our primary use of funds is for the origination and purchase of mortgage loans and the purchase of mortgage-backed and other securities, with emphasis on the origination and purchase of mortgage loans. During the year ended December 31, 2001, our gross originations and purchases of mortgage loans totaled $4.56 billion, compared to $2.73 billion during the year ended December 31, 2000. This increase was primarily attributable to the lower interest rate environment during 2001 which resulted in an increase in mortgage refinance activity. Purchases of mortgage-backed securities totaled $2.03 billion and purchases of other securities totaled $2.0 million during the year ended December 31, 2001. For the year ended December 31, 2000, there were no purchases of mortgage-backed securities and purchases of other securities totaled $6.0 million. The securities purchases during the year ended December 31, 2001 are the result of our redeployment of a portion of our cash flows in excess of our mortgage and other loan fundings. Even with our securities purchases during 2001, our overall securities portfolio decreased from 2000 to 2001, which is consistent with our strategy of repositioning the balance sheet. The rapid decline in interest rates in 2001 resulted in a significant increase in loan and security repayments. Should the pace of repayment activity remain at its recent levels and cash inflows continue to exceed mortgage and other loan fundings, we may continue to purchase mortgage-backed and other securities as we have done in 2001. If repayment activity declines in the future, we will likely reduce our purchases of mortgage-backed and other securities. See “Lending and Investing Activities” for further discussion.

We maintain liquidity levels to meet our operational needs in the normal course of our business. The levels of our liquid assets during any given period are dependent on our operating, investing and financing activities. Cash and due from banks and federal funds sold and repurchase agreements, with maturities of three months or less, our most liquid assets, totaled $1.45 billion at December 31, 2001, compared to $307.3 million at December 31, 2000. Increased loan and security repayments provided this additional liquidity at December 31, 2001, which will be used, in part, to both help fund our approximately $2.2 billion mortgage application pipeline at December 31, 2001 and to help repay a portion of the $850.0 million of borrowings which are maturing in the first quarter of 2002. Total borrowings maturing in 2002 are $1.90 billion with a weighted average rate of 6.81%. We have the flexibility to either repay or rollover such borrowings as they mature. In addition, we have $3.05 billion in certificates of deposit with a weighted average rate of 4.34% maturing in 2002. We expect to retain a significant portion of such deposits based on our competitive pricing and historical experience. These borrowings and certificates of deposit should reprice down to a lower market rate, assuming that interest rates remain near their current levels.

The most significant liquidity challenge we face is the variability in cash flows as a result of mortgage refinance activity. As mortgage interest rates decline, customers’ refinance activities tend to accelerate causing the cash flow from both our mortgage loan portfolio and our mortgage-backed securities portfolio to accelerate. When mortgage rates increase the opposite effect tends to occur. In addition, as mortgage interest rates decrease, customers tend to prefer fixed rate mortgage loan products over variable rate products. Since we generally sell our fifteen year and thirty year fixed rate loan production into the secondary mortgage market, the origination of such products for sale does not significantly reduce our liquidity.

Since our cash flow is primarily utilized for the origination and purchase of mortgage loans, our excess cash flow is primarily utilized for the purchase of mortgage-backed securities. If we are unable to reinvest the excess cash flow, our liquidity will increase. During 2001 as our incoming cash flow accelerated, we increased our balances held in federal funds sold and repurchase agreements due within three months or less. These assets typically have lower yields than the assets which they replaced. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” for further discussion.

In the normal course of business, we routinely enter into various commitments, primarily relating to the origination and purchase of loans, the purchase of securities and the leasing of certain office facilities.

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At December 31, 2001, total commitments outstanding to originate and purchase loans were $917.4 million. There were no outstanding commitments to purchase securities at December 31, 2001. Minimum rental payments due under non-cancelable operating leases for 2002 totaled $6.2 million at December 31, 2001. We anticipate that we will have sufficient funds available to meet our current commitments in the normal course of our business.

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 will not be registered with the Securities and Exchange Commission. The net proceeds from the note placement are being used for general corporate purposes including, but not limited to, the repurchase of our common stock.

On October 28, 1999, our wholly-owned finance subsidiary, Astoria Capital Trust I, issued $125.0 million aggregate liquidation amount of 9.75% Capital Securities due November 1, 2029, Series A, referred to as the Series A Capital Securities. Effective April 26, 2000, $120.0 million aggregate liquidation amount of the Series A Capital Securities were exchanged for a like amount of 9.75% Capital Securities due November 1, 2029, Series B, also issued by Astoria Capital Trust I, referred to as the Series B Capital Securities. The Series A Capital Securities and Series B Capital Securities have substantially identical terms except that the Series B Capital Securities have been registered with the Securities and Exchange Commission. Together they are referred to as the Capital Securities. The Capital Securities are rated “BBB” by Fitch Inc., “BB” by Standard & Poor’s Credit Rating Company and “ba1” by Moody’s Investor Service. The Capital Securities are prepayable, in whole or in part, at our option on or after November 1, 2009 at declining premiums to maturity. Proceeds from the issuance of the Capital Securities totaling $31.3 million were used to increase the capital level of Astoria Federal and the remaining proceeds were used primarily for the repurchase of our common stock.

Stockholders’ equity increased to $1.54 billion at December 31, 2001, from $1.51 billion at December 31, 2000. The increase in stockholders’ equity was the result of net income of $222.9 million, a $119.1 million decrease in the net unrealized loss on securities available-for-sale, net of taxes, which includes amortization of the net unrealized loss on securities transferred to held-to-maturity, the effect of stock options exercised and related tax benefit of $29.9 million, and the amortization of the allocated portion of shares held by the employee stock ownership plan, or ESOP, of $8.0 million. These increases were partially offset by repurchases of our common stock of $289.1 million and dividends declared of $61.3 million.

We declared cash dividends on our common stock totaling $55.3 million during the year ended December 31, 2001 and $48.8 million during the year ended December 31, 2000. During each of the years ended December 31, 2001 and 2000, we declared cash dividends on our Series B Preferred Stock totaling $6.0 million. On January 23, 2002, we declared a quarterly cash dividend of $0.17 per share on shares of our common stock payable on March 1, 2002 to stockholders of record as of the close of business on February 15, 2002.

On October 17, 2001, we declared a two-for-one stock split in the form of a 100% stock dividend. Shareholders received one additional share of our common stock for each share of our common stock owned as of the close of business on November 15, 2001.

During the year ended December 31, 2001, we completed our seventh stock repurchase plan, which was approved by our Board of Directors on August 16, 2000. This plan authorized the purchase, at management’s discretion, of up to 10,000,000 shares, or approximately 10% of our common stock then outstanding. On September 17, 2001, our Board of Directors approved our eighth stock repurchase plan authorizing the purchase, at management’s discretion, of 10,000,000 shares, or approximately 11% of our common stock then outstanding over a two year period in open-market or privately

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negotiated transactions. Under these plans, during the year ended December 31, 2001, we repurchased 10,303,600 shares of our common stock at an aggregate cost of $289.1 million, of which 3,034,600 shares were acquired pursuant to our eighth stock repurchase plan.

At December 31, 2001, Astoria Federal’s capital levels exceeded all of its regulatory capital requirements with a tangible capital ratio of 5.88%, leverage capital ratio of 5.88% and risk-based capital ratio of 13.75%. The minimum regulatory requirements were a tangible capital ratio of 1.50%, leverage capital ratio of 4.00% and risk-based capital ratio of 8.00%.

In 1996, we adopted a Stockholder 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 entitles 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 originally reserved 325,000 shares of our Series A Preferred Stock for the Rights Plan. In 2001, we increased the number of shares of preferred stock reserved for the Rights Plan to 1,225,000 shares.

At the time of the conversion from mutual to stock form of ownership, Astoria Federal was required to establish a liquidation account in an amount equal to its retained earnings as of June 30, 1993. As part of its acquisitions of LIB, The Greater and Fidelity, Astoria Federal established similar liquidation accounts equal to the remaining liquidation account balances previously maintained by those entities as a result of their conversions from mutual to stock form of ownership. These liquidation accounts are reduced to the extent that eligible account holders reduce their qualifying deposits. In the unlikely event of a complete liquidation of Astoria Federal, each eligible account holder will be entitled to receive a distribution from the liquidation accounts. Astoria Federal is not permitted to declare or pay dividends on its capital stock or repurchase any of its outstanding stock if it would cause Astoria Federal’s stockholders’ equity to be reduced below the amounts required for the liquidation accounts or applicable regulatory capital requirements.

Lending and Investing Activities

Our primary lending and investing activities include the origination of mortgage, consumer and other loans and the purchase of mortgage loans, mortgage-backed securities and other securities. Our lending and investing activities through 2001 were reflective of our objective to reposition our balance sheet by focusing our fund deployment on the origination and purchase of one-to-four family mortgage loans. Generally, we sell our one-to-four family fifteen year and thirty year fixed rate mortgage loan production, but retain for portfolio our ARM loan production. Additionally, we originate for portfolio fixed and adjustable rate multi-family and commercial real estate mortgage loans. We are continuing to shift our asset mix towards growth in mortgage loans, primarily ARM loans, versus growth in securities.

At December 31, 2001, our net loan portfolio totaled $12.13 billion, or 53.5% of total assets, which includes $43.4 million of loans held-for-sale. 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. We have an extensive broker network in fourteen states and our third party loan origination program includes relationships with other financial institutions and mortgage bankers in forty five states. The retail loan origination program accounted for approximately $1.30 billion of originations during 2001 and $733.9 million of originations during 2000. The broker loan origination program accounted for approximately $1.83 billion of originations during 2001 and $1.16 billion of originations during 2000. Our third party loan origination program accounted for approximately $1.43 billion of originations during 2001 and $836.8 million of originations during 2000.

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We utilize mortgage-backed and other securities purchases as a complement to our mortgage lending activities. Purchases during 2001 consisted primarily of CMO and REMIC agency and non-agency securities which provide liquidity, collateral for borrowings and minimal credit risk while providing appropriate returns. For the year ended December 31, 2001, purchases of mortgage-backed securities totaled $2.03 billion and purchases of other securities totaled $2.0 million. For the year ended December 31, 2000, there were no purchases of mortgage-backed securities, while purchases of other securities totaled $6.0 million. As previously discussed, the rapid decline in interest rates in 2001 resulted in a significant increase in loan and security repayments. The securities purchases during the year ended December 31, 2001 are a result of our redeployment of a portion of our cash flows in excess of our mortgage and other loan fundings. Overall, our mortgage-backed securities portfolio decreased $800.7 million from December 31, 2000 to December 31, 2001, consistent with our strategy of repositioning the balance sheet.

Comparison of Financial Condition and Operating Results for the Years Ended
December 31, 2001 and 2000

Financial Condition

Total assets increased $330.9 million to $22.67 billion at December 31, 2001, from $22.34 billion at December 31, 2000. We continued our strategy of repositioning the balance sheet through increases in deposits and loans and decreases in securities and borrowings, while limiting asset growth. Mortgage loans, net, including mortgage loans held-for-sale, increased $712.9 million to $11.97 billion at December 31, 2001, from $11.25 billion at December 31, 2000. Gross mortgage loans originated and purchased during the year ended December 31, 2001 totaled $4.56 billion, of which $3.13 billion were originations and $1.43 billion were purchases. This compares to $1.89 billion of originations and $836.8 million of purchases for a total of $2.73 billion during the year ended December 31, 2000. The increase in mortgage loan originations and purchases was primarily a result of the general decrease in market interest rates, which has increased the level of mortgage refinance activity. This increase was partially offset by an increase in mortgage loan repayments to $3.46 billion for the year ended December 31, 2001, from $1.48 billion for the year ended December 31, 2000, which was also primarily a result of the decrease in market interest rates.

Our mortgage loan portfolios, as well as our originations and purchases, continue to consist primarily of one-to-four family mortgage loans. Our one-to-four family mortgage loans, which represent 83.6% of our total loan portfolio at December 31, 2001, increased $282.6 million to $10.15 billion at December 31, 2001, from $9.86 billion at December 31, 2000. Our multi-family mortgage loans increased $292.4 million to $1.09 billion at December 31, 2001, from $801.9 million at December 31, 2000. Our commercial real estate loans increased $118.1 million to $598.3 million at December 31, 2001, from $480.2 million at December 31, 2000.

Mortgage-backed securities decreased $800.7 million to $7.07 billion at December 31, 2001, from $7.87 billion at December 31, 2000. This decrease was the result of principal payments received of $3.01 billion, offset by purchases of $2.03 billion and a decrease in the net unrealized loss on securities available-for-sale of $186.7 million, which includes a $22.6 million net unrealized loss related to securities transferred to held-to-maturity during the second quarter of 2001. The decrease in the net unrealized loss on securities available-for-sale is directly related to the significant decline in market interest rates in 2001. See “Lending and Investing Activities” and Note 3 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data” for further discussion.

In addition to the changes noted above in the mortgage-backed securities and mortgage loan portfolios, other securities decreased $601.6 million to $939.1 million at December 31, 2001, from $1.54 billion at December 31, 2000, primarily due to $695.5 million in securities which were called or matured,

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partially offset by a decrease in the net unrealized loss on securities available-for-sale of $36.2 million, the net accretion of discounts of $55.7 million, and purchases of other securities totaling $2.0 million for the year ended December 31, 2001. Federal funds sold and repurchase agreements increased $1.14 billion to $1.31 billion at December 31, 2001, from $171.5 million at December 31, 2000. Increased loan and security repayments provided additional liquidity at December 31, 2001, which will be used, in part, to both help fund our approximately $2.2 billion mortgage application pipeline at December 31, 2001 and to help repay a portion of the $850.0 million of borrowings which are maturing in the first quarter of 2002.

Bank Owned Life Insurance, or BOLI, decreased $8.8 million to $242.8 million at December 31, 2001, from $251.6 million at December 31, 2000. The BOLI is classified as a non-interest earning asset. Increases in the cash surrender value are recorded as non-interest income and insurance proceeds received are recorded as a reduction of the cash surrender value. Other assets decreased $97.2 million to $112.4 million at December 31, 2001, from $209.6 million at December 31, 2000 primarily due to the decrease in the deferred tax asset which was directly related to the decrease in the net unrealized loss on securities available-for-sale.

Consistent with our strategy of repositioning the balance sheet, we also continued shifting our liability emphasis from borrowings to deposits, particularly lower costing core deposits. Deposits increased $832.0 million to $10.90 billion at December 31, 2001, from $10.07 billion at December 31, 2000. The increase in deposits was primarily due to an increase of $821.4 million in core deposits to $5.74 billion at December 31, 2001, from $4.92 billion at December 31, 2000 which was attributable to our continued emphasis on deposit generation through competitive rates and product offerings. Reverse repurchase agreements decreased $400.0 million to $7.39 billion at December 31, 2001, from $7.79 billion at December 31, 2000. Federal Home Loan Bank of New York advances totaled $1.91 billion at December 31, 2001 and 2000. Other borrowings, net, decreased $102.8 million to $399.6 million at December 31, 2001, from $502.4 million at December 31, 2000. The decrease in borrowings is a result of the repayment of various borrowings which either matured or were called during the year ended December 31, 2001, partially offset by our issuance of $100.0 million of senior unsecured notes. For additional information on the senior unsecured notes see “Liquidity and Capital Resources.”

Stockholders’ equity increased to $1.54 billion at December 31, 2001, from $1.51 billion at December 31, 2000. The increase in stockholders’ equity was the result of net income of $222.9 million, a $119.1 million decrease in the net unrealized loss on securities available-for-sale, net of taxes, which includes amortization of the net unrealized loss on securities transferred to held-to-maturity, the effect of stock options exercised and related tax benefit of $29.9 million, and the amortization of the allocated portion of shares held by the ESOP of $8.0 million. These increases were partially offset by repurchases of our common stock of $289.1 million and dividends declared of $61.3 million.

Results of Operations

General

         Net income for the year ended December 31, 2001 increased $6.4 million to $222.9 million for the year ended December 31, 2001, from $216.5 million for the year ended December 31, 2000. For the year ended December 31, 2001, diluted earnings per common share increased to $2.35 per share, as compared to $2.16 per share for the year ended December 31, 2000. Return on average assets increased to 0.99% for the year ended December 31, 2001, from 0.97% for the year ended December 31, 2000. Return on average stockholders’ equity decreased to 14.13% for the year ended December 31, 2001, from 16.70% for the year ended December 31, 2000. Return on average tangible stockholders’ equity decreased to 16.13% for the year ended December 31, 2001, from 20.02% for the year ended December 31, 2000. The decreases in the returns on stockholders’ equity for the year

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ended December 31, 2001 are the result of a higher level of average stockholders’ equity. The increase in average stockholders’ equity is primarily due to the decrease in the net unrealized loss on securities available-for-sale, net of taxes.

The results of operations for the year ended December 31, 2001 include a $2.3 million, after tax, charge for the cumulative effect of accounting change related to the adoption of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” or SFAS No. 133, and Statement of Financial Accounting Standards No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities — an amendment of FASB Statement No. 133,” or SFAS No. 138, effective January 1, 2001. See Note 1 and Note 11 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data,” for further discussion of the impact of the implementation of SFAS No. 133 and SFAS No. 138. The results of operations for the year ended December 31, 2000 include a $2.5 million, after tax, net gain on the disposition of banking offices and a $3.4 million, after tax, charge for an executive severance payment.

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. 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, 2001, net interest income decreased $37.6 million to $469.4 million, from $507.0 million for the year ended December 31, 2000. This decrease was a result of the decrease in the net interest rate spread to 1.94% for the year ended December 31, 2001, from 2.01% for the year ended December 31, 2000. The change in the net interest rate spread is a result of a decrease in the average yield on average total interest-earning assets to 6.69% for the year ended December 31, 2001, from 6.95% for the year ended December 31, 2000, partially offset by a decrease in the average cost of average total interest-bearing liabilities to 4.75% for the year ended December 31, 2001, from 4.94% for the year ended December 31, 2000. Average net interest-earning assets decreased $268.6 million to $1.09 billion at December 31, 2001, from $1.36 billion at December 31, 2000. The decrease in average net interest-earning assets was the result of a decrease in average total interest-earning assets of $325.1 million to $21.51 billion for the year ended December 31, 2001, from $21.83 billion for the year ended December 31, 2000, partially offset by a decrease in average total interest-bearing liabilities of $56.5 million to $20.42 billion for the year ended December 31, 2001, from $20.48 billion for the year ended December 31, 2000. During the fourth quarter of 2000, we implemented a BOLI program which decreased interest-earning assets by approximately $250.0 million. 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.” The net interest margin was 2.18% for the year ended December 31, 2001 and 2.32% for the year ended December 31, 2000.

Analysis of Net Interest Income

         The following table sets forth certain information about the average balances of our assets and liabilities and the related yields and costs for the years ended December 31, 2001, 2000 and 1999. 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 average balance of loans receivable includes loans on which we have discontinued accruing interest. The yields and costs include fees, costs, premiums and discounts which are considered adjustments to interest rates.

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              For the Year Ended December 31,
         
2001 2000


Average Average
          Average           Yield/   Average                 Yield/
(Dollars in Thousands)   Balance   Interest   Cost   Balance   Interest       Cost

 
 
 
 
 
 
Assets:
 
Interest-earning assets:
Mortgage loans (1):
One-to-four family
$ 10,069,593 $ 694,596 6.90 % $ 9,513,843 $ 673,707 7.08 %
Multi-family, commercial and construction
1,487,504 124,163 8.35 1,143,120 95,837 8.38
Consumer and other loans (1)
206,903 17,853 8.63 177,075 18,237 10.30




Total loans
11,764,000 836,612 7.11 10,834,038 787,781 7.27
Mortgage-backed securities (2)
7,282,666 462,621 6.35 8,805,772 577,808 6.56
Other securities (2)(3)
1,519,647 107,315 7.06 1,878,922 132,426 7.05
Federal funds sold and repurchase agreements
940,394 32,015 3.40 313,053 19,919 6.36




Total interest-earning assets
21,506,707 1,438,563 6.69 21,831,785 1,517,934 6.95


Non-interest-earning assets
1,008,224 480,997


Total assets
$ 22,514,931 $ 22,312,782


Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Savings
$ 2,495,532 46,283 1.85 $ 2,529,448 51,112 2.02
Certificates of deposit
5,223,163 283,125 5.42 4,968,151 282,260 5.68
NOW
1,075,524 5,097 0.47 939,715 5,439 0.58
Money market
1,734,232 65,484 3.78 1,337,754 71,290 5.33




Total deposits
10,528,451 399,989 3.80 9,775,068 410,101 4.20
Borrowed funds
9,891,648 569,200 5.75 10,701,489 600,817 5.61




Total interest-bearing liabilities
20,420,099 969,189 4.75 20,476,557 1,010,918 4.94


Non-interest-bearing liabilities
517,390 539,821


Total liabilities
20,937,489 21,016,378
Stockholders’ equity
1,577,442 1,296,404


Total liabilities and stockholders’ equity
$ 22,514,931 $ 22,312,782


Net interest income/net interest rate spread
$ 469,374 1.94 % $ 507,016 2.01 %




Net interest-earning assets/ net interest margin
$ 1,086,608 2.18 % $ 1,355,228 2.32 %




Ratio of interest-earning assets
to interest-bearing liabilities
1.05x 1.07x



[Additional columns below]

[Continued from above table, first column(s) repeated]
                                       
                For the Year Ended December 31,
                 
1999

                                  Average
                  Average           Yield/
(Dollars in Thousands)           Balance   Interest   Cost

   
 
 
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family
$ 8,601,365 $ 600,850 6.99 %
Multi-family, commercial and construction
930,527 78,773 8.47
Consumer and other loans (1)
200,178 19,285 9.63


Total loans
9,732,070 698,908 7.18
Mortgage-backed securities (2)
10,242,306 658,140 6.43
Other securities (2)(3)
1,837,254 129,030 7.02
Federal funds sold and repurchase agreements
179,408 9,201 5.13


Total interest-earning assets
21,991,038 1,495,279 6.80

Non-interest-earning assets
726,644

Total assets
$ 22,717,682

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Savings
$ 2,697,726 54,341 2.01
Certificates of deposit
4,943,672 258,389 5.23
NOW
888,369 5,110 0.58
Money market
1,038,765 45,316 4.36


Total deposits
9,568,532 363,156 3.80
Borrowed funds
11,321,397 592,175 5.23


Total interest-bearing liabilities
20,889,929 955,331 4.57

Non-interest-bearing liabilities
466,207

Total liabilities
21,356,136
Stockholders’ equity
1,361,546

Total liabilities and stockholders’ equity
$ 22,717,682

Net interest income/net interest rate spread
$ 539,948 2.23 %


Net interest-earning assets/ net interest margin
$ 1,101,109 2.46 %


Ratio of interest-earning assets
to interest-bearing liabilities
1.05x



(1)   Mortgage and consumer and other loans include non-performing loans and exclude the allowance for loan losses.
(2)   Securities available-for-sale are reported at average amortized cost.
(3)   Other securities include Federal Home Loan Bank of New York stock.

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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, 2001   Year Ended December 31, 2000
      Compared to   Compared to
      Year Ended December 31, 2000   Year Ended December 31, 1999
     
 
      Increase (Decrease)   Increase (Decrease)
     
 
(In Thousands)   Volume   Rate   Net   Volume   Rate   Net

 
 
 
 
 
 
Interest-earning assets:
                                               
 
One-to-four family loans
  $ 38,418     $ (17,529 )   $ 20,889     $ 64,972     $ 7,885     $ 72,857  
 
Multi-family, commercial and construction loans
    28,671       (345 )     28,326       17,906       (842 )     17,064  
 
Consumer and other loans
    2,818       (3,202 )     (384 )     (2,327 )     1,279       (1,048 )
 
Mortgage-backed securities
    (97,198 )     (17,989 )     (115,187 )     (93,486 )     13,154       (80,332 )
 
Other securities
    (25,299 )     188       (25,111 )     2,858       538       3,396  
 
Federal funds sold and repurchase agreements
    24,856       (12,760 )     12,096       8,108       2,610       10,718  
 
 
   
     
     
     
     
     
 
Total
    (27,734 )     (51,637 )     (79,371 )     (1,969 )     24,624       22,655  
 
 
   
     
     
     
     
     
 
Interest-bearing liabilities:
                                               
 
Savings
    (664 )     (4,165 )     (4,829 )     (3,490 )     261       (3,229 )
 
Certificates of deposit
    14,113       (13,248 )     865       1,299       22,572       23,871  
 
NOW
    746       (1,088 )     (342 )     329             329  
 
Money market
    18,001       (23,807 )     (5,806 )     14,650       11,324       25,974  
 
Borrowed funds
    (46,310 )     14,693       (31,617 )     (33,262 )     41,904       8,642  
 
 
   
     
     
     
     
     
 
Total
    (14,114 )     (27,615 )     (41,729 )     (20,474 )     76,061       55,587  
 
 
   
     
     
     
     
     
 
Net change in net interest income
  $ (13,620 )   $ (24,022 )   $ (37,642 )   $ 18,505     $ (51,437 )   $ (32,932 )
 
 
   
     
     
     
     
     
 

Interest Income

Interest income for the year ended December 31, 2001 decreased $79.4 million to $1.44 billion, from $1.52 billion for the year ended December 31, 2000. This decrease was the result of a decrease in the average yield on average interest-earning assets to 6.69% for the year ended December 31, 2001, from 6.95% for the year ended December 31, 2000, coupled with a decrease of $325.1 million in the average balance of interest-earning assets to $21.51 billion for the year ended December 31, 2001, from $21.83 billion for the year ended December 31, 2000. The decrease in the average yield on average interest-earning assets was due to the decreases in the average yields on primarily all asset categories which reflects the declining interest rate environment we have experienced in 2001. The decrease in average interest-earning assets was primarily due to decreases in the average balances of mortgage-backed securities and other securities, resulting from principal repayments, maturities and calls, partially offset by increases in the average balances of mortgage loans and federal funds sold and repurchase agreements. Additionally, we implemented a BOLI program in the fourth quarter of 2000 which decreased interest-earning assets by approximately $250.0 million. The decrease and shift in interest-earning assets reflects our decision to limit balance sheet growth while continuing to emphasize

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one-to-four family mortgage lending. As previously discussed, the FOMC rate reductions during 2001, which totaled 475 basis points, have created a significantly different interest rate environment than that which existed at December 31, 2000. Despite strong loan originations, our cash flows from operations, loan and securities repayments and deposit growth exceeded loan originations and other investment purchases, resulting in the significant increase in the average balance of federal funds sold and repurchase agreements for the year ended December 31, 2001.

Interest income on one-to-four family mortgage loans increased $20.9 million to $694.6 million for the year ended December 31, 2001, from $673.7 million for the year ended December 31, 2000, which was primarily the result of a $555.8 million increase in the average balance, partially offset by a decrease in the average yield to 6.90% for the year ended December 31, 2001, from 7.08% for the year ended December 31, 2000. Interest income on multi-family, commercial real estate and construction loans increased $28.4 million to $124.2 million for the year ended December 31, 2001, from $95.8 million for the year ended December 31, 2000, which was primarily the result of a $344.4 million increase in the average balance, slightly offset by a decrease in the average yield to 8.35% for the year ended December 31, 2001, from 8.38% for the year ended December 31, 2000. The increase in the average balance of mortgage loans reflects our continued emphasis on the origination of mortgage loans, primarily one-to-four family. The decrease in the average yields reflects the decline in interest rates during 2001.

Interest income on consumer and other loans decreased $384,000 resulting from a decrease in the average yield to 8.63% for the year ended December 31, 2001, from 10.30% for the year ended December 31, 2000, partially offset by an increase of $29.8 million in the average balance of this portfolio. The decrease in the average yield on consumer and other loans is primarily a result of the decrease in the average yield on our home equity loans which represent 78.2% of our consumer and other loan portfolio at December 31, 2001. Home equity loans are adjustable rate loans which generally reset monthly and are indexed to the Prime Rate. The Prime Rate decreased 475 basis points during the year ended December 31, 2001 in response to the FOMC rate reductions discussed previously.

Interest income on mortgage-backed securities decreased $115.2 million to $462.6 million for the year ended December 31, 2001, from $577.8 million for the year ended December 31, 2000. This decrease was the result of a $1.52 billion decrease in the average balance of the portfolio, coupled with a decrease in the average yield to 6.35% for the year ended December 31, 2001, from 6.56% for the year ended December 31, 2000. Interest income on other securities decreased $25.1 million, resulting from a decrease of $359.3 million in the average balance of this portfolio, primarily due to securities being called as a result of the declining interest rate environment. This decrease was slightly offset by an increase in the average yield to 7.06% for the year ended December 31, 2001, from 7.05% for the year ended December 31, 2000, primarily as a result of prepayment penalties we received on securities which were called. Interest income on federal funds sold and repurchase agreements increased $12.1 million as a result of an increase of $627.3 million in the average balance of the portfolio, partially offset by a decrease in the average yield to 3.40% for the year ended December 31, 2001, from 6.36% for the year ended December 31, 2000.

Interest Expense

Interest expense for the year ended December 31, 2001 decreased $41.7 million to $969.2 million, from $1.01 billion for the year ended December 31, 2000. This decrease was the result of a decrease in the average cost of interest-bearing liabilities to 4.75% for the year ended December 31, 2001, from 4.94% for the year ended December 31, 2000, coupled with a decrease of $56.5 million in the average balance of interest-bearing liabilities. The decrease in the overall average cost of our interest-bearing liabilities reflects the impact of the lower interest rate environment that prevailed during 2001 on the cost of our deposits. The decrease in the average balance of interest-bearing liabilities was attributable

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to a decrease in borrowings, partially offset by an increase in deposits, which is consistent with our strategy of repositioning our balance sheet.

Interest expense on deposits decreased $10.1 million, to $400.0 million for the year ended December 31, 2001, from $410.1 million for the year ended December 31, 2000, reflecting a decrease in the average cost of deposits to 3.80% for the year ended December 31, 2001, from 4.20% for the year ended December 31, 2000, partially offset by an increase of $753.4 million in the average balance of total deposits. The decrease in the average cost and the increase in the average balance of total deposits were primarily driven by decreases in rates, as a result of the lower interest rate environment in 2001, and increases in the average total balance of money market and certificate of deposit accounts.

Interest expense on money market accounts decreased $5.8 million reflecting a decrease in the average cost to 3.78% for the year ended December 31, 2001, from 5.33% for the year ended December 31, 2000, partially offset by an increase of $396.5 million in the average balance of such accounts. Interest paid on money market accounts is on a tiered basis with 90.73% of the balance in the highest tier (accounts with balances of $50,000 and higher). The yield on the highest tier is priced relative to the discount rate for the three-month U.S. Treasury bill, which provides an attractive short-term yield for our customers. The decrease in the average cost of these deposits is reflective of the decline in market interest rates during 2001.

Interest expense on certificates of deposit increased $865,000 resulting from an increase in the average balance of $255.0 million, substantially offset by a decrease in the average cost to 5.42% for the year ended December 31, 2001, from 5.68% for the year ended December 31, 2000. The decrease in the average cost of certificates of deposit is due to the effect of the lower interest rate environment in 2001. The increase in the average balance of certificates of deposit reflects our commitment to offer competitive rates to our customers, as well as our strategy to shift our liability mix. Interest expense on savings accounts decreased $4.8 million which was attributable to a decrease in the average cost to 1.85% for the year ended December 31, 2001, from 2.02% for the year ended December 31, 2000, coupled with a decrease of $33.9 million in the average balance. Interest expense on NOW accounts decreased $342,000 as a result of a decrease in the average cost to 0.47% for the year ended December 31, 2001, from 0.58% for the year ended December 31, 2000, partially offset by an increase of $135.8 million in the average balance.

Interest expense on borrowed funds for the year ended December 31, 2001 decreased $31.6 million to $569.2 million, from $600.8 million for year ended December 31, 2000, resulting from a decrease of $809.8 million in the average balance, partially offset by an increase in the average cost of borrowings to 5.75% for the year ended December 31, 2001, from 5.61% for the year ended December 31, 2000. The rising interest rate environment which prevailed throughout most of 2000 resulted in most of our borrowings being called upon reaching their call dates during the year ended December 31, 2000. While a portion of the called borrowings were repaid, the remainder of the called borrowings were rolled over into short- and medium-term borrowings without call features and at higher rates, thereby increasing the overall cost of our borrowings. However, $1.90 billion in borrowings with an average rate of 6.81% will mature during 2002, which should result in a reduction in our cost of borrowings through either the refinancing of those borrowings at lower rates, assuming that interest rates remain near their current levels, or the repayment of those borrowings.

Provision for Loan Losses

         Provision for loan losses totaled $4.0 million for the years ended December 31, 2001 and 2000. The allowance for loan losses increased to $82.3 million at December 31, 2001, from $79.9 million at December 31, 2000. The provision for loan losses for 2001 and the resultant increase in the allowance for loan losses reflects the overall increase in our loan portfolio, particularly increases in our multi-family and commercial real estate portfolios which generally involve a greater degree of risk than one-

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to-four family mortgage loans and, as a result, require a larger reserve percentage. Net loan charge-offs totaled $1.7 million for the year ended December 31, 2001 compared to $661,000 for the year ended December 31, 2000. Non-performing loans increased $929,000 to $37.1 million at December 31, 2001, from $36.2 million at December 31, 2000. The allowance for loan losses as a percentage of non-performing loans increased slightly to 221.70% at December 31, 2001, from 220.88% at December 31, 2000. The allowance for loan losses as a percentage of total loans decreased to 0.68% at December 31, 2001, from 0.70% at December 31, 2000, primarily due to the increase of $745.0 million in total loans from December 31, 2000 to December 31, 2001. For further discussion of non-performing loans and allowance for loan losses, see “Asset Quality.”

Non-Interest Income

Non-interest income for the year ended December 31, 2001 increased $23.2 million, or 29.9%, to $101.0 million, from $77.8 million for the year ended December 31, 2000. Included in non-interest income for the year ended December 31, 2000 is a $4.0 million net gain on the disposition of banking offices. The increase in non-interest income is primarily due to an increase in income from BOLI and customer service and other loan fees.

Income from BOLI, which was purchased in November of 2000, was $16.8 million for the year ended December 31, 2001, reflecting a full year’s impact of this purchase, compared to $1.6 million for the year ended December 31, 2000. Increases in the cash surrender value of BOLI are recorded as income.

Customer service and other loan fees increased $10.1 million to $58.9 million for the year ended December 31, 2001, from $48.8 million for the year ended December 31, 2000. The increase in customer service fees was primarily attributable to an increase in the number of demand deposit and NOW accounts, an increase in customer service fees which became effective during the first quarter of 2001, and continued focus on our sales initiatives.

Loan servicing fees decreased $2.0 million to $15.1 million for the year ended December 31, 2001, from $17.1 million for the year ended December 31, 2000. Loan servicing fees include all contractual and ancillary servicing revenue we receive. The decrease in loan servicing fees was the result of a decrease in the balance of loans serviced for others to $3.32 billion at December 31, 2001, from $3.93 billion at December 31, 2000. The decrease in the balance of loans serviced for others is the result of runoff in that portfolio, due to repayments exceeding the level of new servicing volume from loan sales.

Net gain on sales of loans increased $2.4 million to $3.3 million for the year ended December 31, 2001, from $866,000 for the year ended December 31, 2000. The increase in the net gain on sales of loans is primarily due to an increase in the volume of fixed rate loans originated and sold into the secondary market. The current interest rate environment has resulted in a significant increase in refinance activity and greater demand for fixed rate loans, the majority of which are not retained for our portfolio. Other non-interest income increased $1.5 million to $6.9 million for the year ended December 31, 2001, from $5.4 million for the year ended December 31, 2000. This increase is primarily due to income related to the dissolution of a trust account previously established for certain former executives.

Net gain on disposition of banking offices totaled $4.0 million for the year ended December 31, 2000. We recorded a net gain of $2.8 million during the second quarter of 2000 related to the sale of the former LIB headquarters and a net gain of $1.2 million during the first quarter of 2000 related to the sale of a former Long Island Savings Bank banking office.

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Non-Interest Expense

Non-interest expense for the year ended December 31, 2001 was $221.1 million, a decrease of $9.0 million from $230.1 million for the year ended December 31, 2000. Included in non-interest expense for the year ended December 31, 2000 is a $5.4 million charge for a severance payment made upon the resignation of one of our executive officers in the fourth quarter of 2000.

General and administrative expense decreased $4.8 million to $176.4 million for the year ended December 31, 2001, from $181.2 million for the year ended December 31, 2000, including the previously mentioned $5.4 million severance payment. Excluding the executive severance payment, general and administrative expense increased primarily due to an increase in compensation and benefits expense, partially offset by decreases in advertising and other general and administrative expense.

Compensation and benefits increased $5.1 million to $92.8 million for the year ended December 31, 2001, from $87.7 million for the year ended December 31, 2000, including the $5.4 million severance payment. The increase is primarily attributable to normal performance increases in salaries, our incentive compensation program and an increase in net employee benefit plan expense. Also included in this increase was a $3.0 million increase in ESOP expense for the year ended December 31, 2001 compared to the year ended December 31, 2000. The increase in ESOP expense is primarily due to the effect of the higher average market value of our common stock during 2001 compared to 2000, as well as an increase in the cash contribution paid to participant accounts in 2001.

Advertising expense decreased $3.3 million to $4.9 million for the year ended December 31, 2001, from $8.2 million for the year ended December 31, 2000. During 2001, we significantly reduced print advertising and focused our resources on the continued development of our sales and service efforts. Other expenses decreased $7.9 million to $24.3 million for the year ended December 31, 2001, from $32.2 million for the year ended December 31, 2000. This decrease relates primarily to a $3.0 million charge to legal expense we recorded during the year ended December 31, 2000 related to the Weil Litigation. See Item 3, “Legal Proceedings” for a further discussion regarding the Weil Litigation. Occupancy, equipment and systems expense increased $1.4 million to $52.4 million for the year ended December 31, 2001, from $51.0 million for the year ended December 31, 2000. Federal deposit insurance premiums decreased $83,000 to $2.0 million for the year ended December 31, 2001, from $2.1 million for the year ended December 31, 2000.

For the year ended December 31, 2001, net amortization of mortgage servicing rights increased by $2.4 million to $10.9 million, from $8.5 million for the year ended December 31, 2000. Net amortization of mortgage servicing rights, as reported in the consolidated statements of income, includes valuation allowance adjustments for the impairment of mortgage servicing rights. For the year ended December 31, 2001, the increase in the net amortization of mortgage servicing rights is due to a $3.0 million increase in the amortization of mortgage servicing rights, partially offset by a $600,000 decrease in the provision for the valuation allowance of mortgage servicing rights. The increase in the amortization of mortgage servicing rights is due to the increased prepayments and refinance activity experienced during 2001. The decrease in the provision for the valuation allowance of mortgage servicing rights is the result of the decrease in the balance of mortgage servicing assets from December 31, 2000 to December 31, 2001.

Goodwill litigation expense decreased $6.4 million to $2.2 million for the year ended December 31, 2001, from $8.6 million for the year ended December 31, 2000, reflecting the completion of fact-based discovery regarding our claims. For further discussion on the goodwill litigation proceedings, see Item 3, “Legal Proceedings.”

Our percentage of general and administrative expense to average assets was 0.78% for the year ended December 31, 2001, compared to 0.81% for the year ended December 31, 2000. The efficiency ratio

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was 30.93% for the year ended December 31, 2001, compared to 31.21% for the year ended December 31, 2000.

Income Tax Expense

For the year ended December 31, 2001, income tax expense was $120.0 million, representing an effective tax rate of 34.8%, compared to $134.1 million, representing an effective tax rate of 38.3%, for the year ended December 31, 2000. The reduction in the effective tax rate for the year ended December 31, 2001 was primarily due to tax benefits associated with the implementation of the BOLI program in November 2000 and the reduction of the deferred tax valuation allowance from a realization of a portion of the tax reserves for New York State and New York City tax purposes.

Comparison of Financial Condition and Operating Results for the Years Ended
December 31, 2000 and 1999

Financial Condition

Total assets decreased $359.7 million to $22.34 billion at December 31, 2000, from $22.70 billion at December 31, 1999. This decrease was consistent with our strategy of repositioning the balance sheet, through increases in deposits and loans and decreases in securities and borrowings, while limiting asset growth in response to the interest rate environment which prevailed during the second half of 1999 and throughout 2000. Mortgage loans, net, including mortgage loans held-for-sale, increased $1.13 billion, from $10.12 billion at December 31, 1999 to $11.25 billion at December 31, 2000. Gross mortgage loans originated and purchased during the year ended December 31, 2000 totaled $2.73 billion, of which $1.89 billion were originations and $836.8 million were purchases. These originations and purchases consisted primarily of one-to-four family mortgage loans. This compares to $3.34 billion of originations and $417.6 million of purchases for a total of $3.76 billion during the year ended December 31, 1999. The decrease in the mortgage loan originations was primarily a result of the general increase in market interest rates, which had significantly decreased the level of mortgage refinance activity, and the sale of certain loan production offices in March 1999. This reduction was offset by a slowdown in loan prepayments, also a result of the increase in interest rates. Mortgage-backed securities decreased $1.41 billion to $7.87 billion at December 31, 2000, from $9.29 billion at December 31, 1999. This decrease was the result of principal payments received of $1.76 billion, offset by a decrease in the net unrealized loss on securities available-for-sale of $348.2 million.

In addition to the changes noted above in the mortgage-backed securities and mortgage loan portfolios, other securities increased $65.2 million to $1.54 billion at December 31, 2000, from $1.48 billion at December 31, 1999, primarily due to the accretion of discounts on our U.S. Government and agency securities coupled with a decrease in the net unrealized loss on securities available-for-sale. Federal funds sold and repurchase agreements decreased $164.2 million from $335.7 million at December 31, 1999, to $171.5 million at December 31, 2000.

The cash surrender value of BOLI, which we established in the fourth quarter of 2000, was $251.6 million at December 31, 2000. Other assets decreased $184.7 million from $394.3 million at December 31, 1999, to $209.6 million at December 31, 2000, primarily due to the decrease in the deferred tax asset which was directly related to the decrease in the net unrealized loss on securities available-for-sale. Premises and equipment, net, decreased $22.2 million from $176.8 million at December 31, 1999 to $154.6 million at December 31, 2000, primarily due to the completion of the sale of the former LIB headquarters in April 2000. See “Non-Interest Income.”

Consistent with our strategy of repositioning the balance sheet, we also continued shifting our liability emphasis from borrowings to deposits. As a result, reverse repurchase agreements decreased $1.49

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billion to $7.79 billion at December 31, 2000, from $9.28 billion at December 31, 1999. Federal Home Loan Bank of New York advances increased $299.9 million to $1.91 billion at December 31, 2000 from $1.61 billion at December 31, 1999. The net decrease in borrowings was the result of the repayment of a portion of the $4.57 billion in borrowings which either matured or were called during the year ended December 31, 2000, with the remaining balance of these borrowings rolled into short- and medium-term borrowings without call features. Deposits increased $517.2 million from $9.55 billion at December 31, 1999 to $10.07 billion at December 31, 2000, primarily due to our emphasis on deposit generation through competitive rates and product offerings.

         Stockholders’ equity totaled $1.51 billion at December 31, 2000 and $1.20 billion at December 31, 1999. Increases to stockholders’ equity included a $223.2 million decrease in the net unrealized loss on securities available-for-sale, net of taxes, net income of $216.5 million, the effect of stock options exercised and related tax benefit of $10.5 million, and the amortization of the allocated portion of shares held by the ESOP and RRP and the related tax benefit of $5.4 million. These increases were partially offset by repurchases of our common stock of $84.6 million and dividends declared of $54.8 million.

Results of Operations

General

Net income for the year ended December 31, 2000 decreased $19.2 million to $216.5 million for the year ended December 31, 2000, from $235.7 million for the year ended December 31, 1999. For the year ended December 31, 2000, diluted earnings per common share decreased to $2.16 per share, from $2.19 per share for the year ended December 31, 1999. Return on average assets decreased to 0.97% for the year ended December 31, 2000, from 1.04% for the year ended December 31, 1999. Return on average stockholders’ equity decreased to 16.70% for the year ended December 31, 2000, from 17.31% for the year ended December 31, 1999. Return on average tangible stockholders’ equity decreased to 20.02% for the year ended December 31, 2000, from 20.92% for the year ended December 31, 1999.

The results of operations for the year ended December 31, 2000 include a $2.5 million, after tax, net gain on the disposition of banking offices and a $3.4 million, after tax, charge for a severance payment made upon the resignation of one of our executive officers. The results of operations for the year ended December 31, 1999 include an $11.3 million, after tax, net gain on the disposition of banking offices.

Net Interest Income

For the year ended December 31, 2000, net interest income decreased $32.9 million, or 6.1%, to $507.0 million, from $539.9 million for the year ended December 31, 1999. This decrease was a result of the decrease in the net interest rate spread from 2.23% for the year ended December 31, 1999, to 2.01% for the year ended December 31, 2000. The change in the net interest rate spread is a result of an increase in the average cost of interest-bearing liabilities from 4.57% for the year ended December 31, 1999, to 4.94% for the year ended December 31, 2000, partially offset by an increase in the average yield on interest-earning assets from 6.80% for the year ended December 31, 1999, to 6.95% for the year ended December 31, 2000. This decrease in the net interest rate spread was partially offset by an increase in average net interest-earning assets of $254.1 million, from $1.10 billion at December 31, 1999, to $1.36 billion at December 31, 2000. The increase in average net interest-earning assets was the result of a decrease in average total interest-bearing liabilities of $413.4 million, from $20.89 billion for the year ended December 31, 1999, to $20.48 billion for the year ended December 31, 2000, and a decrease in average total interest-earning assets of $159.3 million, from $21.99 billion for the year ended December 31, 1999, to $21.83 billion for the year ended

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December 31, 2000. The net interest margin was 2.32% for the year ended December 31, 2000 and 2.46% for the year ended December 31, 1999.

Interest Income

Interest income for the year ended December 31, 2000 increased $22.7 million, or 1.5%, to $1.52 billion, from $1.50 billion for the year ended December 31, 1999. This increase was the result of an increase in the average yield on interest-earning assets from 6.80% for the year ended December 31, 1999, to 6.95% for the year ended December 31, 2000 reflecting the generally higher interest rate environment that prevailed from the middle of 1999 through 2000. The increase in the average yield on interest-earning assets is primarily due to an increase in the average yield on mortgage-backed securities coupled with an increase in the average yield on mortgage loans. This increase was partially offset by a decrease in the average balance of interest-earning assets of $159.3 million from $21.99 billion for 1999, to $21.83 billion for 2000. The decrease in average interest-earning assets was primarily due to a decrease in the average balance of mortgage-backed securities resulting from principal repayments, partially offset by an increase in the average balance of mortgage loans. The decrease and shift in assets reflect our decision to limit balance sheet growth while continuing to emphasize mortgage lending, primarily one-to-four family.

Interest income on one-to-four family mortgage loans increased $72.8 million to $673.7 million for the year ended December 31, 2000, from $600.9 million for the year ended December 31, 1999, which was primarily the result of a $912.5 million increase in the average balance, coupled with an increase in the average yield to 7.08% for the year ended December 31, 2000, from 6.99% for the year ended December 31, 1999. Interest income on multi-family, commercial real estate and construction loans increased $17.0 million to $95.8 million for the year ended December 31, 2000, from $78.8 million for the year ended December 31, 1999, which was primarily the result of a $212.6 million increase in the average balance, partially offset by a decrease in the average yield to 8.38% for the year ended December 31, 2000, from 8.47% for the year ended December 31, 1999. The increase in the average balance of mortgage loans reflects our continued emphasis on the origination of primarily one-to-four family mortgage loans coupled with a reduction in repayments. The increase in the average yield on one-to-four family mortgage loans reflects the increase in interest rates during the period as well as the effect of the upward repricing of ARM loans. Interest income on consumer and other loans decreased $1.0 million resulting from a decrease in the average balance of this portfolio of $23.1 million, partially offset by an increase in the average yield to 10.30% for the year ended December 31, 2000, from 9.63% for the year ended December 31, 1999.

Interest income on mortgage-backed securities decreased $80.3 million to $577.8 million for the year ended December 31, 2000, from $658.1 million for the year ended December 31, 1999. This decrease was the result of a $1.44 billion decrease in the average balance of the portfolio, partially offset by an increase in the average yield to 6.56% for the year ended December 31, 2000, from 6.43% for the year ended December 31, 1999. Interest income on other securities increased $3.4 million resulting from an increase in the average balance of this portfolio of $41.7 million, coupled with a slight increase in the average yield to 7.05% for the year ended December 31, 2000, from 7.02% for the year ended December 31, 1999. The decrease in the average balance of mortgage-backed securities reflects our strategy of repositioning the balance sheet, while the increase in the average balance of other securities is primarily due to the accretion of unearned discounts. Interest income on federal funds sold and repurchase agreements increased $10.7 million as a result of an increase in the average balance of $133.6 million, coupled with an increase in the average yield to 6.36% for the year ended December 31, 2000, from 5.13% for the year ended December 31, 1999.

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Interest Expense

Interest expense for the year ended December 31, 2000 increased $55.6 million, to $1.01 billion, from $955.3 million for the year ended December 31, 1999. This increase was the result of an increase in the average cost of interest-bearing liabilities to 4.94% for the year ended December 31, 2000, from 4.57% for the year ended December 31, 1999, partially offset by a $413.4 million decrease in the average balance of interest-bearing liabilities. The decrease in average interest-bearing liabilities was attributable to a decrease in average borrowings, partially offset by an increase in average deposits. The increase in the overall average cost of our interest-bearing liabilities reflects the higher interest rate environment that prevailed from the middle of 1999 through 2000.

Interest expense on deposits increased $46.9 million, to $410.1 million for the year ended December 31, 2000, from $363.2 million for the year ended December 31, 1999, reflecting an increase in the average cost of deposits to 4.20% for the year ended December 31, 2000, from 3.80% for the year ended December 31, 1999, coupled with an increase in the average balance of total deposits of $206.5 million. The increases in the average balance and average cost of total deposits were primarily the result of increases in the average balances and rates on our money market accounts and certificates of deposit. Interest expense on money market accounts increased $26.0 million reflecting an increase in the average balance of $299.0 million, coupled with an increase in the average cost to 5.33% for the year ended December 31, 2000, from 4.36% for the year ended December 31, 1999. Interest paid on money market accounts is on a tiered basis with 90.02% of the balance in the highest tier (accounts with balances of $50,000 and higher). The yield on the highest tier is priced relative to the discount rate for the three-month U.S. Treasury bill, which provides an attractive short-term yield for our customers.

Interest expense on certificates of deposit increased $23.9 million resulting from an increase in the average cost to 5.68% for the year ended December 31, 2000, from 5.23% for the year ended December 31, 1999, coupled with a slight increase in the average balance of $24.5 million. The increase in the average cost of certificates of deposit reflects the higher interest rate environment and our commitment to offer competitive rates to our customers. Interest expense on savings accounts decreased $3.2 million which was attributable to a decrease in the average balance of $168.3 million. Interest expense on NOW accounts increased $329,000 as a result of an increase in the average balance of such accounts of $51.3 million.

Interest expense on borrowed funds for the year ended December 31, 2000 increased $8.6 million, to $600.8 million, from $592.2 million for year ended December 31, 1999, resulting from an increase in the average cost of borrowings to 5.61% for the year ended December 31, 2000, from 5.23% for the year ended December 31, 1999, partially offset by a decrease in the average balance of $619.9 million. Previous asset growth was primarily funded through callable borrowings, which in a lower interest rate environment, was a cost effective way to fund our growth. The rising interest rate environment in 1999 and 2000 resulted in most of our borrowings being called upon reaching their call dates. While a portion of the called borrowings were repaid, the remainder were rolled over into short- and medium-term borrowings without call features at higher rates.

Provision for Loan Losses

Provision for loan losses decreased $105,000, to $4.0 million for the year ended December 31, 2000, from $4.1 million for the year ended December 31, 1999. The allowance for loan losses increased to $79.9 million at December 31, 2000, from $76.6 million at December 31, 1999. The increase in the allowance for loan losses reflects the overall increase in our loan portfolio. Net loan charge-offs totaled $661,000 for the year ended December 31, 2000 compared to $1.9 million for the year ended December 31, 1999. Non-performing loans decreased $17.2 million to $36.2 million at December 31, 2000, from $53.4 million at December 31, 1999. This reduction in non-performing loans improved the

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percentage of allowance for loan losses to non-performing loans from 143.49% at December 31, 1999 to 220.88% at December 31, 2000. The allowance for loan losses as a percentage of total loans decreased from 0.74% at December 31, 1999 to 0.70% at December 31, 2000 primarily due to the increase of $1.14 billion in total loans from December 31, 1999 to December 31, 2000. For further discussion of non-performing loans and allowance for loan losses, see “Asset Quality.”

Non-Interest Income

Non-interest income for the year ended December 31, 2000 decreased $14.7 million, or 15.9%, to $77.8 million from $92.5 million for the year ended December 31, 1999, including the net gain on disposition of banking offices of $4.0 million in 2000 and $19.2 million in 1999.

Customer service and other loan fees increased $8.8 million to $48.8 million for the year ended December 31, 2000, from $40.0 million for the year ended December 31, 1999. The increase in customer service fees was due to several factors. The year ended December 31, 2000 includes the full recognition of fee income on debit cards, which were first issued during the third quarter of 1999; an increase in customer service fees which became effective during the third quarter of 1999; an increase in annuity sales commissions; and an increase in checking account fees related to the increase in the number of checking accounts since December 31, 1999.

Loan servicing fees decreased $4.1 million to $17.1 million for 2000, from $21.2 million for 1999. The decrease in loan servicing fees was the result of a decrease in the balance of loans serviced for others from $4.41 billion at December 31, 1999 to $3.93 billion at December 31, 2000.

Net gain on sales of loans decreased $2.5 million to $866,000 for the year ended December 31, 2000, from $3.3 million for the year ended December 31, 1999. The decrease in the net gain on sales of loans was a result of the decrease in loan sale activity, resulting primarily from the sale and disposition of our loan production offices and the higher interest rate environment which shifted consumer demands to adjustable rate loans which we retain for portfolio. During the year ended December 31, 2000, we recognized $1.6 million in income from our BOLI which we purchased in November 2000. This income represents the increase in the cash surrender value of the BOLI. Other non-interest income decreased $2.7 million to $5.4 million for the year ended December 31, 2000, from $8.1 million for the year ended December 31, 1999. This decrease is partially the result of a $981,000 gain we recognized in 1999 on the sale of one of our joint venture properties.

Net gain on disposition of banking offices totaled $4.0 million for the year ended December 31, 2000, compared to $19.2 million for the year ended December 31, 1999. We recorded a net gain of $2.8 million during the second quarter of 2000 related to the sale of the former LIB headquarters and a net gain of $1.2 million during the first quarter of 2000 related to the sale of a former Long Island Savings Bank banking office. The net gain for the year ended December 31, 1999 resulted from the $20.4 million net gain recognized on the sale of our five upstate New York banking offices in the third quarter of 1999 and the net loss of $1.2 million from the closing and disposition of certain loan production offices in the first quarter of 1999.

Non-Interest Expense

Non-interest expense for the year ended December 31, 2000 was $230.1 million, an increase of $1.2 million from $228.9 million for the year ended December 31, 1999. Included in non-interest expense is a $5.4 million charge for a severance payment made upon the resignation of one of our executive officers in the fourth quarter of 2000.

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General and administrative expense decreased $13.9 million to $181.2 million for the year ended December 31, 2000, from $195.1 million for the year ended December 31, 1999, including the previously mentioned $5.4 million severance payment. The decrease was primarily concentrated in compensation and benefits expense.

Compensation and benefits decreased $12.2 million to $87.7 million for the year ended December 31, 2000, from $99.9 million for the year ended December 31, 1999, including the $5.4 million severance payment. The decrease is primarily attributable to a decrease in salary expense, which includes a decrease in overtime and incentives, and a decrease in net employee benefit plan expense. Also included in this decrease was a $3.6 million decrease in ESOP expense for the year ended December 31, 2000 compared to the year ended December 31, 1999. The decrease in ESOP expense is primarily due to the effect of the lower average market value of our common stock during the period.

Occupancy, equipment and systems expense decreased $2.7 million to $51.0 million for the year ended December 31, 2000, from $53.7 million for the year ended December 31, 1999 due in large part to $1.5 million in expense recorded in 1999 related to the testing of our computer systems for the ability to recognize the date change to the year 2000. Federal deposit insurance premiums decreased $2.4 million, from $4.5 million for the year ended December 31, 1999, to $2.1 million for the year ended December 31, 2000 as a result of an assessment rate decrease. Advertising expense increased $1.3 million to $8.2 million for 2000, from $6.9 million for 1999. Other expenses increased $2.2 million to $32.2 million for 2000, from $30.0 million for 1999 primarily due to a $3.0 million charge to legal expense we recorded during the year ended December 31, 2000 related to the Weil litigation. See Item 3, “Legal Proceedings” for a further discussion regarding the Weil litigation.

Net amortization of mortgage servicing rights increased $2.7 million to $8.5 million for the year ended December 31, 2000, from $5.8 million for the year ended December 31, 1999. For the year ended December 31, 2000, the increase in the net amortization of mortgage servicing rights was the result of a $1.9 million valuation allowance versus a recovery of $2.5 million for the year ended December 31, 1999, partially offset by a decrease in the amortization of mortgage servicing rights of $1.7 million. This decrease in amortization of mortgage servicing rights is due to the decrease in prepayment speeds and refinance activity which is a result of the interest rate environment which prevailed during 2000. The increase in the valuation allowance is due to the increase in projected prepayment speeds resulting from the perception of declining rates in the future.

Goodwill litigation expense increased $2.2 million to $8.6 million for 2000, from $6.4 million for 1999. For further discussion on the goodwill litigation proceedings, see Item 3, “Legal Proceedings.” Capital trust securities expense increased $10.2 million to $12.4 million for the year ended December 31, 2000 from $2.2 million for the year ended December 31, 1999 reflecting a full year’s expense of the Capital Securities issued in the fourth quarter of 1999. For further discussion of the Capital Securities, see Note 9 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

Our percentage of general and administrative expense to average assets improved to 0.81% for the year ended December 31, 2000, from 0.86% for the year ended December 31, 1999. The efficiency ratio also improved to 31.21% for the year ended December 31, 2000, from 31.88% for the year ended December 31, 1999.

Income Tax Expense

For the year ended December 31, 2000, income tax expense was $134.1 million, representing an effective tax rate of 38.3%, as compared to $163.8 million, representing an effective tax rate of 41.0%, for the year ended December 31, 1999. The reduction in the effective tax rate from December 31,

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1999 to December 31, 2000 was due to additional tax benefits associated with the corporate restructuring completed in 1999.

Asset Quality

Our non-performing assets continue to remain at very low levels in relation to both the size of our loan portfolio and relative to our peers. Non-performing assets increased slightly to $40.1 million at December 31, 2001, from $40.0 million at December 31, 2000. The ratio of non-performing loans to total loans decreased to 0.31% at December 31, 2001, from 0.32% at December 31, 2000. The ratio of non-performing assets to total assets was 0.18% at December 31, 2001 and 2000. See Item 1, “Business” for further discussion of our asset quality.

The following table sets forth information regarding non-performing assets. In addition to the non-performing loans, we had approximately $3.2 million of potential problem loans at December 31, 2001 compared to $3.0 million at December 31, 2000. Such loans are 60-89 days delinquent as shown on page 58.

Non-Performing Assets

                                           
      At December 31,
     
(Dollars in Thousands)   2001   2000   1999   1998   1997

 
 
 
 
 
Non-accrual delinquent mortgage loans (1)
  $ 34,848     $ 34,332     $ 48,830     $ 100,302     $ 80,604  
Non-accrual delinquent consumer and other loans
    991       903       1,626       5,995       4,563  
Mortgage loans delinquent 90 days or more and still accruing interest (2)
    1,277       952       2,913       4,776       4,728  
 
   
     
     
     
     
 
 
Total non-performing loans
    37,116       36,187       53,369       111,073       89,895  
 
   
     
     
     
     
 
Real estate owned, net (3)
    2,987       3,801       5,080       6,071       12,734  
Investment in real estate, net (4)
                      3,266       12,633  
 
   
     
     
     
     
 
 
Total real estate owned and investment in real estate, net
    2,987       3,801       5,080       9,337       25,367  
 
   
     
     
     
     
 
 
Total non-performing assets
  $ 40,103     $ 39,988     $ 58,449     $ 120,410     $ 115,262  
 
   
     
     
     
     
 
Allowance for loan losses to non-performing loans
    221.70 %     220.88 %     143.49 %     66.99 %     82.23 %
Allowance for loan losses to total loans
    0.68 %     0.70 %     0.74 %     0.84 %     0.94 %


(1)   Consists primarily of loans secured by one-to-four family properties.
(2)   Loans delinquent 90 days or more and still accruing interest consist solely of loans delinquent 90 days or more as to their maturity date but not their interest due, and are primarily secured by one-to-four family properties.
(3)   Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is recorded at the lower of cost or fair value, less estimated selling costs.
(4)   Investment in real estate is recorded at the lower of cost or fair value.

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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 $2.3 million for the year ended December 31, 2001, $2.9 million for the year ended December 31, 2000 and $3.8 million for the year ended December 31, 1999. This compares to actual payments recorded as interest income, with respect to such loans, of $1.8 million for the year ended December 31, 2001, $1.6 million for the year ended December 31, 2000 and $1.9 million for the year ended December 31, 1999.

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 $5.4 million at December 31, 2001, $5.2 million at December 31, 2000, $6.7 million at December 31, 1999, $6.9 million at December 31, 1998 and $9.1 million at December 31, 1997.

The following table shows a comparison of delinquent loans at December 31, 2001, 2000 and 1999.

Delinquent Loans

                     
        Principal Balance of Loans Past Due
       
(Dollars in Thousands)   60-89 Days   90 Days or More

 
 
At December 31, 2001 :
               
 
One-to-four family
  $ 1,269     $ 31,991  
 
Multi-family
    84       1,860  
 
Commercial real estate
    1,395       1,752  
 
Construction
          522  
 
Consumer and other loans
    491       991  
 
   
     
 
   
Total delinquent loans
  $ 3,239     $ 37,116  
 
   
     
 
 
Delinquent loans to total loans
    0.03 %     0.31 %
At December 31, 2000:
               
 
One-to-four family
  $ 1,459     $ 32,529  
 
Multi-family
          990  
 
Commercial real estate
    791       1,535  
 
Construction
          230  
 
Consumer and other loans
    728       903  
 
   
     
 
   
Total delinquent loans
  $ 2,978     $ 36,187  
 
   
     
 
 
Delinquent loans to total loans
    0.03 %     0.32 %
At December 31, 1999:
               
 
One-to-four family
  $ 2,202     $ 48,610  
 
Multi-family
          802  
 
Commercial real estate
    2,015       2,101  
 
Construction
    354       230  
 
Consumer and other loans
    1,033       1,626  
 
   
     
 
   
Total delinquent loans
  $ 5,604     $ 53,369  
 
   
     
 
 
Delinquent loans to total loans
    0.05 %     0.52 %

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Allowance for Losses

The following table sets forth our allowance for losses on loans, REO and investments in real estate at the dates indicated.

                                             
        At or For the Year Ended December 31,
       
(Dollars in Thousands)   2001   2000   1999   1998   1997

 
 
 
 
 
Allowance for losses on loans:
                                       
Balance at beginning of year
  $ 79,931     $ 76,578     $ 74,403     $ 73,920     $ 48,001  
 
Allowance of acquired institution
                            25,433  
 
Provision charged to operations
    4,028       4,014       4,119       15,380       9,061  
 
Charge-offs:
                                       
   
One-to-four family
    (506 )     (963 )     (1,554 )     (13,039 )     (3,971 )
   
Multi-family
    (3 )     (8 )     (12 )     (769 )     (2,059 )
   
Commercial real estate
    (464 )           (686 )     (1,528 )     (60 )
   
Construction
                (159 )           (12 )
   
Consumer and other
    (1,554 )     (1,678 )     (4,298 )     (3,824 )     (4,726 )
 
   
     
     
     
     
 
 
Total charge-offs
    (2,527 )     (2,649 )     (6,709 )     (19,160 )     (10,828 )
 
   
     
     
     
     
 
 
Recoveries:
                                       
   
One-to-four family
    263       802       1,540       1,616       728  
   
Multi-family
          136       270       516        
   
Commercial real estate
          496       1,591             581  
   
Construction
    9       79             1,788       36  
   
Consumer and other
    581       475       1,364       489       908  
 
   
     
     
     
     
 
 
Total recoveries
    853       1,988       4,765       4,409       2,253  
 
   
     
     
     
     
 
 
Net charge-offs
    (1,674 )     (661 )     (1,944 )     (14,751 )     (8,575 )
 
Adjustment to conform fiscal year of Long Island Bancorp, Inc. to Astoria Financial Corporation
                      (146 )      
 
   
     
     
     
     
 
Balance at end of year
  $ 82,285     $ 79,931     $ 76,578     $ 74,403     $ 73,920  
 
   
     
     
     
     
 
Ratio of net charge-offs during the year to average loans outstanding during the year
    0.01 %     0.01 %     0.02 %     0.17 %     0.13 %
Ratio of allowance for loan losses to total loans at end of the year
    0.68       0.70       0.74       0.84       0.94  
Ratio of allowance for loan losses to non-performing loans at end of the year
    221.70       220.88       143.49       66.99       82.23  
Allowance for losses on REO and investments in real estate:
                                       
Balance at beginning of year
  $ 3     $ 171     $ 689     $ 1,493     $ 2,045  
 
Allowance of acquired institution
                            94  
 
(Recovery) provision recorded to operations
    (64 )     (109 )     (38 )     1,108       1,035  
 
Charge-offs
    (17 )     (113 )     (587 )     (2,835 )     (1,726 )
 
Recoveries
    78       54       107       241       45  
 
Adjustment to conform fiscal year of Long Island Bancorp, Inc. to Astoria Financial Corporation
                      682        
 
   
     
     
     
     
 
Balance at end of year
  $     $ 3     $ 171     $ 689     $ 1,493  
 
   
     
     
     
     
 

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         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. As previously mentioned, multi-family and commercial real estate loans generally involve a greater degree of credit risk than one-to-four family loans. The increases in the reserves allocated to multi-family and commercial real estate loans reflect the overall increases in the balances of those portfolios. The portion of the allowance for loan losses allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total loan loss reserve is a valuation reserve applicable to the entire loan portfolio.

                                                 
    At December 31,
   
    2001   2000   1999
   
 
 
            % 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
  $ 49,122       83.59 %   $ 49,826       86.79 %   $ 44,556       88.07 %
Multi-family
    8,612       9.05       6,721       7.07       5,086       6.02  
Commercial real estate
    8,529       4.95       7,771       4.23       8,440       3.89  
Construction
    1,329       0.42       573       0.30       2,325       0.34  
Consumer and other
    14,693       1.99       15,040       1.61       16,171       1.68  
 
   
     
     
     
     
     
 
Total allowance for loan losses
  $ 82,285       100.00 %   $ 79,931       100.00 %   $ 76,578       100.00 %
 
   
     
     
     
     
     
 
                                 
    At December 31,
   
    1998   1997
   
 
            % of Loans           % of Loans
            to           to
(Dollars in Thousands)   Amount   Total Loans   Amount   Total Loans

 
 
 
 
One-to-four family
  $ 42,084       87.12 %   $ 40,715       86.15 %
Multi-family
    3,426       5.16       5,305       4.82  
Commercial real estate
    8,004       4.72       12,882       5.54  
Construction
    2,533       0.43       794       0.22  
Consumer and other
    18,356       2.57       14,224       3.27  
 
   
     
     
     
 
Total allowance for loan losses
  $ 74,403       100.00 %   $ 73,920       100.00 %
 
   
     
     
     
 

Operating Earnings and Operating Cash Earnings

The following information is not a required disclosure but is being presented because we consider it relevant to our operating results and related returns. The information represents pro forma calculations which are not in conformity with GAAP. Different companies may present this information differently, if at all. Readers are cautioned against using this information to compare our operating and cash operating results and related returns to that of another company which may not calculate this information in a similar manner. For a reconciliation of GAAP earnings, operating earnings and operating cash earnings, see “Consolidated Schedules of Operating Earnings and Operating Cash Earnings” on page 63.

Operating Earnings

Operating earnings represent GAAP earnings adjusted for various income and expense components which we believe are infrequent and therefore are not representative of our recurring operations. The comparisons of operating earnings which follow exclude the $2.3 million, after tax, charge for the cumulative effect of accounting change in 2001, the net gain on the disposition of banking offices of $2.5 million, after tax, in 2000 and $11.3 million, after tax, in 1999, and the $3.4 million, after tax, ($5.4 million, before tax) charge for the executive severance payment in 2000.

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For the year ended December 31, 2001, operating earnings increased $7.8 million to $225.2 million, from $217.4 million for the year ended December 31, 2000. Diluted operating earnings per common share for the year ended December 31, 2001 increased to $2.38 per share, from $2.17 per share for the year ended December 31, 2000. The operating return on average assets for the year ended December 31, 2001 increased to 1.00%, from 0.97% for the year ended December 31, 2000. The operating return on average stockholders’ equity for the year ended December 31, 2001 decreased to 14.27%, from 16.77% for the year ended December 31, 2000. The operating return on average tangible stockholders’ equity for the year ended December 31, 2001 decreased to 16.29%, from 20.10% for the year ended December 31, 2000. As noted in our discussion of GAAP earnings, the decreases in the returns on stockholders’ equity are primarily the result of the decrease in the net unrealized loss on securities available-for-sale, net of taxes, which contributed to the increase in average stockholders’ equity. Our percentage of operating general and administrative expense to average assets was 0.78% for the year ended December 31, 2001, compared to 0.79% for the year ended December 31, 2000. The operating efficiency ratio was 30.93% for the year ended December 31, 2001, compared to 30.27% for the year ended December 31, 2000.

For the year ended December 31, 2000, operating earnings decreased $6.9 million to $217.4 million, from $224.3 million for the year ended December 31, 1999. Diluted operating earnings per common share for the year ended December 31, 2000 increased to $2.17 per share from $2.08 per share for the year ended December 31, 1999. The operating return on average assets for the year ended December 31, 2000 decreased to 0.97%, from 0.99% for the year ended December 31, 1999. The operating return on average stockholders’ equity for the year ended December 31, 2000 increased to 16.77%, from 16.48% for the year ended December 31, 1999. The operating return on average tangible stockholders’ equity for the year ended December 31, 2000 increased to 20.10%, from 19.91% for the year ended December 31, 1999. Our percentage of operating general and administrative expense to average assets was 0.79% for the year ended December 31, 2000, compared to 0.86% for the year ended December 31, 1999. The operating efficiency ratio was 30.27% for the year ended December 31, 2000, compared to 31.88% for the year ended December 31, 1999.

Operating Cash Earnings

Tangible stockholders’ equity (stockholders’ equity less goodwill) is a critical measure of a company’s ability to repurchase shares, pay dividends and continue to grow. Astoria Federal is subject to various capital requirements which affect its classification for safety and soundness purposes, as well as for deposit insurance assessment purposes. These requirements utilize, subject to further adjustments, tangible stockholders’ equity as a base component, not stockholders’ equity as defined by GAAP. Although reported earnings and return on stockholders’ equity are traditional measures of a company’s performance, we believe that the change in tangible stockholders’ equity, or “cash earnings,” and related return measures are also a significant measure of a company’s performance. Cash earnings exclude the effects of various non-cash expenses, such as the employee stock plans amortization expense and related tax benefit, as well as the amortization of goodwill. In the case of tangible stockholders’ equity, these items have either been previously charged to stockholders’ equity, as in the case of employee stock plans amortization expense, through contra-equity accounts, or do not affect tangible stockholders’ equity, such as the market appreciation of allocated ESOP shares, for which the operating charge is offset by a credit to additional paid-in capital, and goodwill amortization for which the related intangible asset has already been deducted in the calculation of tangible stockholders’ equity.

Operating cash earnings equal operating earnings adjusted for the non-cash expenses noted above.

Tangible stockholders’ equity totaled $1.36 billion at December 31, 2001, compared to $1.31 billion at December 31, 2000. For the year ended December 31, 2001, operating cash earnings totaled $252.4 million, or $27.2 million more than operating earnings, representing an operating cash return on average tangible stockholders’ equity of 18.26%. For the year ended December 31, 2000, operating

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cash earnings totaled $243.2 million, or $25.7 million more than operating earnings, representing an operating cash return on average tangible stockholders’ equity of 22.48%. Diluted operating cash earnings per common share increased to $2.67 per share for the year ended December 31, 2001, from $2.43 per share for the year ended December 31, 2000. Operating cash return on average assets was 1.12% for the year ended December 31, 2001 and 1.09% for the year ended December 31, 2000. Additionally, the operating cash general and administrative expense (general and administrative expense, excluding non-cash amortization expense relating to certain employee stock plans) to average assets ratio was 0.75% for the year ended December 31, 2001, compared to 0.76% for the year ended December 31, 2000. The operating cash efficiency ratio was 29.53% for the year ended December 31, 2001 and 29.17% for the year ended December 31, 2000.

Tangible stockholders’ equity totaled $1.31 billion at December 31, 2000, compared to $973.0 million at December 31, 1999. For the year ended December 31, 2000, operating cash earnings totaled $243.2 million, or $25.7 million more than operating earnings, representing a cash return on average tangible equity of 22.48%. For the year ended December 31, 1999, operating cash earnings totaled $257.6 million, or $33.2 million more than operating earnings, representing an operating cash return on average tangible stockholders’ equity of 22.86%. Diluted operating cash earnings per common share increased to $2.43 per share for the year ended December 31, 2000, from $2.40 per share for the year ended December 31, 1999. Operating cash return on average assets was 1.09% for the year ended December 31, 2000 and 1.13% for the year ended December 31, 1999. Additionally, the operating cash general and administrative expense to average assets ratio decreased to 0.76% for the year ended December 31, 2000, from 0.82% for the year ended December 31, 1999. The operating cash efficiency ratio was 29.17% for the year ended December 31, 2000 and 30.26% for the year ended December 31, 1999.

As previously discussed, as a result of the implementation of SFAS No. 142, effective January 1, 2002, we will cease recording goodwill amortization amounting to approximately $19.1 million annually, or approximately $0.21 per diluted common share. Consequently, reported earnings and related returns as defined by GAAP will not differ as significantly as it has in the past from cash earnings and related cash returns beginning in 2002.

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CONSOLIDATED SCHEDULES OF OPERATING EARNINGS AND OPERATING CASH EARNINGS (1)

                           
      For the Year Ended December 31,
     
(In Thousands, Except Share Data)   2001   2000   1999

 
 
 
Schedules of Operating Earnings
                       
Net income
  $ 222,860     $ 216,549     $ 235,670  
 
Cumulative effect of accounting change, net of tax
    2,294              
 
Executive severance payment, net of tax
          3,350        
 
Net gain on disposition of banking offices, net of tax
          (2,455 )     (11,332 )
 
   
     
     
 
Operating earnings
    225,154       217,444       224,338  
Preferred dividends declared
    (6,000 )     (6,000 )     (6,000 )
 
   
     
     
 
Operating earnings available to common shareholders
  $ 219,154     $ 211,444     $ 218,338  
 
   
     
     
 
Basic operating earnings per common share (2)
  $ 2.43     $ 2.20     $ 2.13  
 
   
     
     
 
Diluted operating earnings per common share (2)
  $ 2.38     $ 2.17     $ 2.08  
 
   
     
     
 
Schedules of Operating Cash Earnings
                       
Operating earnings
  $ 225,154     $ 217,444     $ 224,338  
 
Employee stock plans amortization expense and related tax benefit (3)
    8,005       6,424       13,797  
 
Amortization of goodwill
    19,242       19,296       19,425  
 
   
     
     
 
Operating cash earnings
    252,401       243,164       257,560  
Preferred dividends declared
    (6,000 )     (6,000 )     (6,000 )
 
   
     
     
 
Operating cash earnings available to common shareholders
  $ 246,401     $ 237,164     $ 251,560  
 
   
     
     
 
Basic operating cash earnings per common share (2)
  $ 2.72     $ 2.47     $ 2.45  
 
   
     
     
 
Diluted operating cash earnings per common share (2)
  $ 2.67     $ 2.43     $ 2.40  
 
   
     
     
 
Basic weighted average common shares (2)
    90,450,157       95,905,712       102,702,710  
Diluted weighted average common and common equivalent shares (2)
    92,174,012       97,434,678       105,013,924  


(1)   The consolidated schedules of operating earnings and operating cash earnings are pro forma calculations which are not in accordance with GAAP.
(2)   Share and per share data have been adjusted to reflect the two-for-one common stock split in the form of a 100% stock dividend on December 3, 2001.
(3)   The year ended December 31, 1999 includes $3.9 million of income tax benefit on amortization expense related to the earned portion of Recognition and Retention Plan stock.

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Impact of New and Proposed Accounting Standards

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations,” or SFAS No. 141, and SFAS No. 142. SFAS No. 141 requires that all business combinations in the scope of SFAS No. 141 are to be accounted for using one method, the purchase method, and that goodwill and other intangible assets acquired in a business combination shall be accounted for in accordance with the provisions of SFAS No. 142. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Previously, goodwill and other intangible assets were amortized in determining net income. SFAS No. 142 assumes goodwill has an indefinite useful life and should not be amortized, but rather tested, at least annually, for impairment. SFAS No. 142 also provides specific guidance for testing goodwill for impairment.

The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. SFAS No. 142 is applicable to fiscal years beginning after December 15, 2001 and is required to be applied at the beginning of an entity’s fiscal year to all goodwill and other intangible assets recognized in its financial statements at that date. Impairment losses for goodwill and indefinite-lived intangible assets that arise due to the initial application of SFAS No. 142 are to be reported as resulting from a change in accounting principle.

Effective January 1, 2002, we will cease recording goodwill amortization amounting to approximately $19.1 million annually, or approximately $0.21 per diluted common share, based on diluted weighted average common and common equivalent shares outstanding for the year ended December 31, 2001. Upon adoption of SFAS No. 142, we performed a transitional goodwill impairment evaluation. We identified a single reporting unit, for purposes of our goodwill impairment testing, and determined the fair value of this reporting unit to be in excess of its carrying value. As such, at the date of adoption, no indication of goodwill impairment exists.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS No. 144, which replaces Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. We do not believe that there will be a material impact on our financial condition or results of operations upon adoption of SFAS No. 144.

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 interest rate risk, or 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.

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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, and, to a lesser degree, Net Portfolio Value, or NPV, analysis. 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

The interest rate sensitivity gap analysis measures the difference between the amount of interest-earning assets anticipated to mature or reprice within specific time periods and the amount of interest-bearing liabilities anticipated to mature or reprice within the same time periods. The table on page 66, referred to as the Gap Table, sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2001 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 and demographic variables. The Gap Table does not indicate the impact of general interest rate movements on our net interest income because the actual repricing dates of various assets and liabilities will differ from our estimates and it does not give consideration to the yields and costs of the assets and liabilities or the projected yields and costs to replace or retain those assets and liabilities. Callable features of certain assets and liabilities, in addition to the foregoing, may also cause actual experience to vary from that indicated. The uncertainty and volatility of interest rates, economic conditions and other markets which affect the value of these call options, as well as the financial condition and strategies of the holders of the options, increase the difficulty and uncertainty in predicting when they may be exercised. Among the factors considered in our estimates are current trends and historical repricing experience with respect to similar products. As a result, different assumptions may be used at different points in time.

During 2001, the FOMC reduced the federal funds rate on eleven occasions by a total of 475 basis points. These reductions, along with an economic recession, have created a significantly different interest rate environment than that which existed at December 31, 2000. In the December 31, 2000 Gap Table, callable borrowings were classified according to their call dates. This classification was reflective of our experience throughout 2000, which indicated that, in a rising interest rate environment, issuers of callable borrowings were exercising their call options. Conversely, during a period of falling interest rates, issuers of callable borrowings would generally not exercise their call options, as was our experience during 2001. As a result, we have modified our Gap Table assumptions to reflect the current interest rate environment and behavior. The Gap Table includes approximately $5.94 billion of callable borrowings classified according to their maturity dates, primarily in the one to three years category, which are callable within one year and at various times thereafter. As indicated in the Gap Table, our one-year cumulative gap was a negative 0.34%. This compares to a one-year cumulative gap of negative 16.75% at December 31, 2000, as previously reported. However, utilizing the December 31, 2001 assumptions (i.e. callable borrowings are not called), our one-year cumulative gap at December 31, 2000 would have been a negative 0.49%.

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      At December 31, 2001
     
              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)
  $ 2,906,045     $ 3,524,191     $ 3,240,193     $ 2,183,386     $ 11,853,815  
 
Consumer and other loans (1)
    204,642       33,321       3,138             241,101  
 
Federal funds sold and repurchase agreements
    1,309,164                         1,309,164  
 
Mortgage-backed and other securities available-for-sale and FHLB stock
    1,257,882       789,661       433,325       1,318,765       3,799,633  
 
Mortgage-backed and other securities held-to-maturity
    1,148,989       1,289,966       724,910       1,305,248       4,469,113  
 
 
   
     
     
     
     
 
Total interest-earning assets
    6,826,722       5,637,139       4,401,566       4,807,399       21,672,826  
Net unamortized purchase premiums and deferred costs (2)
    18,888       21,627       20,241       12,678       73,434  
 
 
   
     
     
     
     
 
Net interest-earning assets
    6,845,610       5,658,766       4,421,807       4,820,077       21,746,260  
 
 
   
     
     
     
     
 
Interest-bearing liabilities:
                                       
 
Savings
    142,466       284,933       284,933       1,875,811       2,588,143  
 
Money market
    1,793,125       17,070       17,070       128,021       1,955,286