10-K 1 af2016123110k.htm 10-K Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-K
 
 
(Mark One)
[X]
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For the fiscal year ended December 31, 2016
 
 
[  ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number  001-11967
ASTORIA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
 
 
11-3170868
(State or other jurisdiction of incorporation or organization)
 
 
 
(I.R.S. Employer Identification Number)
One Astoria Bank Plaza, Lake Success, New York
 
11042-1085
 
(516) 327-3000
(Address of principal executive offices)
 
(Zip code)
 
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
Depositary Shares, each representing a 1/40th interest in a share of 6.50% Non-Cumulative Perpetual Preferred Stock, Series C
 


New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 
YES   X     NO       
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. 
YES           NO   X  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES    X       NO       
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
YES    X       NO       
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     X   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer    X   Accelerated Filer        Non-accelerated filer        Smaller reporting company       
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES        NO  X  
The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2016, based on the closing price for a share of the registrant’s Common Stock on that date as reported by the New York Stock Exchange, was $1.50 billion.
The number of shares of the registrant’s Common Stock outstanding as of February 16, 2017 was 101,228,083 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be utilized in connection with the 2017 Annual Meeting of Stockholders or any amendments to this Form 10-K, which will be filed with the Securities and Exchange Commission within 120 days from December 31, 2016, are incorporated by reference into Part  III.



ASTORIA FINANCIAL CORPORATION
2016 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

This Annual Report on Form 10-K contains a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements may be identified by the use of the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar terms and phrases, including references to assumptions.

Forward-looking statements are based on various assumptions and analyses made by us in light of our management’s experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate under the circumstances. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors (many of which are beyond our control) that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. These factors include, without limitation, the following:

the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond our control;
the impact of the termination of the Agreement and Plan of Merger, or the Merger Agreement with New York Community Bancorp, Inc., a Delaware corporation, or NYCB, including any resulting changes in our operations;
increases in competitive pressure among financial institutions or from non-financial institutions;
changes in the interest rate environment;
changes in deposit flows, loan demand or collateral values;
changes in accounting principles, policies or guidelines;
changes in general economic conditions, either nationally or locally in some or all areas in which we do business, or conditions in the real estate or securities markets or the banking industry;
legislative or regulatory changes, including those that may be implemented by the new administration in Washington, D.C.;
supervision and examination by the Office of the Comptroller of the Currency, or OCC, the Board of Governors of the Federal Reserve System, or the FRB, and the Consumer Financial Protection Bureau, or CFPB;
effects of changes in existing U.S. government or government-sponsored mortgage programs;
our ability to successfully implement technological changes;
our ability to successfully consummate new business initiatives;
litigation or other matters before regulatory agencies, whether currently existing or commencing in the future;
our ability to implement enhanced risk management policies, procedures and controls commensurate with shifts in our business strategies and regulatory expectations.

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



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

ITEM 1.
BUSINESS

General

We are a Delaware corporation organized in 1993 as the unitary savings and loan holding company of Astoria Bank and its consolidated subsidiaries, or Astoria Bank. We are headquartered in Lake Success, New York and our principal business is the operation of our wholly-owned subsidiary, Astoria Bank. Astoria Bank’s primary business is attracting retail deposits from the general public and businesses and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowings, primarily in multi-family and commercial real estate mortgage loans, one-to-four family, or residential, mortgage loans, and mortgage-backed securities. To a lesser degree, Astoria Bank also invests in consumer and other loans, U.S. government, government agency and government-sponsored enterprise, or GSE, securities and other investments permitted by federal banking laws and regulations.

Astoria Bank was established in 1888 as a local, community-oriented bank that delivered exceptional service, a core philosophy that remains our focus today. Since inception, we have operated on a simple business model of providing residential mortgage loans funded primarily by retail deposits of the customers that live and work near our branch franchise. In 2011, we set forth on developing plans to transform our balance sheet, both the asset side and the liability side, through the expansion of the products and services we offer, as well as enhancements to the delivery channels, in the communities and to the customers we serve. We focus on growing our core businesses of mortgage portfolio lending and deposit gathering while maintaining strong asset quality and operating expense management. We continue to implement our strategies to diversify earning assets and to increase low cost negotiable order of withdrawal, or NOW, and demand deposit, money market and savings accounts, or core deposits. These strategies include a greater level of participation in the local multi-family and commercial real estate mortgage lending markets and expanding our array of business banking products and services, focusing on small and middle market businesses with an emphasis on attracting clients from larger competitors. Our physical presence consists presently of our branch network of 88 locations, plus our dedicated business banking office in midtown Manhattan.

Our results of operations are dependent primarily on our net interest income, which is the difference between the interest earned on our assets, primarily our loan and securities portfolios, and the interest paid on our deposits and borrowings. Our net income is also affected by our provision for loan losses, non-interest income, non-interest expense (general and administrative expense) and income tax expense. Non-interest income includes customer service fees; other loan fees; net gain on sales of securities; mortgage banking income, net; income from bank owned life insurance, or BOLI; and other non-interest income. General and administrative expense consists of compensation and benefits expense; occupancy, equipment and systems expense; federal deposit insurance premium expense; advertising expense; and other operating expenses. 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 Bank, Astoria Financial Corporation has one other direct wholly-owned subsidiary, AF Insurance Agency, Inc., which is consolidated with Astoria Financial Corporation for financial reporting purposes. AF Insurance Agency, Inc. is a licensed life insurance agency that makes insurance products available primarily to the customers of Astoria Bank through contractual agreements with various third parties.

Available Information

Our internet website address is www.astoriabank.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports can be obtained free of charge from our investor

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relations website at http://ir.astoriabank.com. The above reports are available on our website as soon as reasonably practicable after we file such material with, or furnish such material to, the Securities and Exchange Commission, or SEC. Such reports are also available on the SEC’s website at www.sec.gov/edgar/searchedgar/webusers.htm.

Lending Activities

General

Our loan portfolio is comprised primarily of mortgage loans. At December 31, 2016, 52% of our total loan portfolio was secured by residential properties and 46% was secured by multi-family properties and commercial real estate, compared to 54% and 44%, respectively, at December 31, 2015. The remainder of the loan portfolio consists of a variety of consumer and other loans, including commercial and industrial loans and home equity loans. At December 31, 2016, our net loan portfolio totaled $10.33 billion, or 71% of total assets.

We originate multi-family and commercial real estate mortgage loans either indirectly through commercial mortgage brokers or through direct solicitation by our banking officers in New York in connection with our business banking operations. We originate residential mortgage loans either directly through our banking and loan production offices in New York or indirectly through brokers and our third party loan origination program. Mortgage loan originations and purchases for portfolio totaled $1.48 billion for the year ended December 31, 2016 and $1.51 billion for the year ended December 31, 2015. At December 31, 2016, $6.28 billion, or 62%, of our total mortgage loan portfolio was secured by properties located in New York and $3.86 billion, or 38%, of our total mortgage loan portfolio was secured by properties located in 34 other states and the District of Columbia. In addition to New York, we have a concentration of 5% or greater of our total mortgage loan portfolio in Connecticut at 5%, and in New Jersey, at 5%.

We also originate mortgage loans for sale in the secondary market. Generally, we originate 15 and 30 year fixed rate residential mortgage loans that conform to GSE guidelines (conforming loans) for sale to various GSEs or other investors on a servicing released or retained basis. The sale of such loans is generally arranged through a master commitment on a mandatory delivery or best efforts basis. Originations of residential mortgage loans held-for-sale totaled $129.7 million in 2016 and $127.7 million in 2015, all of which were originated through our retail loan origination program. Loans serviced for others totaled $1.35 billion at December 31, 2016.

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

Residential Mortgage Lending

Our primary residential lending emphasis is on the origination and purchase of first mortgage loans secured by properties that serve as the primary residence of the owner. We also originate a limited number of second home mortgage loans, which are reflected as a component of our consumer and other loans, described further below. At December 31, 2016, residential mortgage loans totaled $5.37 billion, or 52% of our total loan portfolio, of which $3.43 billion, or 64%, were hybrid adjustable rate mortgage, or ARM, loans and $1.94 billion, or 36%, were fixed rate loans.

Residential mortgage loan originations and purchases for portfolio totaled $763.9 million during 2016 and $616.9 million during 2015. Our residential retail loan origination program accounted for $317.9 million of portfolio originations during 2016 and $311.3 million during 2015. We also have a residential broker network covering four states, primarily along the East Coast. Our residential broker loan origination program consists of relationships with mortgage brokers and accounted for $72.1 million of portfolio originations during 2016 and $78.6 million during 2015. We purchase individual mortgage loans through our third party loan origination program which are subject to the same underwriting standards as our retail and broker originations. Our third party loan origination program includes relationships with other financial institutions and mortgage bankers covering 13 states and the District of Columbia and accounted for residential portfolio purchases of $373.9 million during 2016 and $227.0 million during 2015. Our various loan origination programs provide efficient and diverse delivery channels for deployment of our cash flows.

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Additionally, our broker and third party loan origination programs provide geographic diversification, reducing our exposure to concentrations of credit risk.

We offer amortizing hybrid ARM loans with terms up to 30 years which initially have a fixed rate for five, seven or ten years and convert into one year ARM loans at the end of the initial fixed rate period. Prior to 2014, we also offered amortizing hybrid ARM loans with terms up to 40 years and loans with an initial fixed rate period of three years. Our amortizing hybrid ARM loans require the borrower to make principal and interest payments during the entire loan term. Our portfolio of residential amortizing hybrid ARM loans totaled $3.10 billion, or 58% of our total residential mortgage loan portfolio, at December 31, 2016. Prior to the 2010 fourth quarter, we offered interest-only hybrid ARM loans with terms of up to forty years, which have an initial fixed rate for five or seven years and convert into one year interest-only ARM loans at the end of the initial fixed rate period. Our interest-only hybrid ARM loans require the borrower to pay interest only during the first ten years of the loan term. After the tenth anniversary of the loan, principal and interest payments are required to amortize the loan over the remaining loan term. Our portfolio of residential interest-only hybrid ARM loans totaled $330.5 million, or 6% of our total residential mortgage loan portfolio, at December 31, 2016. We do not originate one year ARM loans. The ARM loans in our portfolio which currently reprice annually represent hybrid ARM loans (interest-only and amortizing) which have passed their initial fixed rate period. We do not originate negative amortization loans, payment option loans or other loans with short-term interest-only periods.

Within our residential mortgage loan portfolio we have reduced documentation loan products, substantially all of which are hybrid ARM loans (interest-only and amortizing). Reduced documentation loans are comprised primarily stated income, full asset, or SIFA, loans. To a lesser extent, our portfolio of reduced documentation loans also includes stated income, stated asset, or SISA, loans. During the 2007 fourth quarter, we stopped offering reduced documentation loans. Reduced documentation loans in our residential mortgage loan portfolio totaled $731.8 million, or 14% of our total residential mortgage loan portfolio at December 31, 2016, and included $114.8 million of SISA loans.

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 increase when the loan is beyond its initial fixed rate period, particularly if the interest rate during the initial fixed rate period was at a discounted rate, increasing the potential for default. Interest-only hybrid ARM loans have an additional potential risk element when the loan payments adjust after the tenth anniversary of the loan to include principal payments, resulting in a further increase in the underlying payments. Since our interest-only hybrid ARM loans have a relatively long period to the principal payment adjustment, we believe this alleviates some of the additional credit risk due to the longer period for the borrower’s income to adjust to anticipated higher future payments. Additionally, we consider these risk factors in our underwriting of such loans and we do not offer loans with initial rates at deep discounts to the fully indexed rate. At December 31, 2016, $1.41 billion of residential mortgage loans originated in prior years as interest-only loans were included in our portfolio of amortizing residential mortgage loans. Such loans consist of $870.3 million of loans which converted pursuant to their contractual terms and $542.8 million of loans which were refinanced at an earlier stage through a program under which certain re-underwriting procedures were completed. Of total loans which had previously been interest-only, $84.1 million were non-performing at December 31, 2016, the majority of which converted pursuant to their contractual terms.

Our reduced documentation loans have additional elements of risk since not all of the information provided by the borrower was verified. SIFA and SISA loans required a prospective borrower to complete a standard mortgage loan application. SIFA loans required the verification of a potential borrower’s asset information on the loan application, but not the income information provided. Our reduced documentation loan products required the receipt of an appraisal of the real estate used as collateral for the mortgage loan and a credit report on the prospective borrower. The loans were priced according to our internal risk assessment of the loan giving consideration to the loan-to-value ratio, the potential borrower’s credit scores and various other credit criteria.

We continue to manage the greater risk posed by our hybrid ARM loans through the application of sound underwriting policies and risk management procedures. Our risk management procedures and underwriting policies include a variety of factors and analyses. These include, but are not limited to, the determination of the markets in which we lend; the

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products we offer and the pricing of those products; the evaluation of potential borrowers and the characteristics of the property supporting the loan; the monitoring and analyses of the performance of our portfolio, in the aggregate and by segment, at various points in time and trends over time; and our collection efforts and marketing of delinquent and non-performing loans and foreclosed properties. We monitor our market areas and the performance and pricing of our various loan product offerings to determine the prudence of continuing to offer such loans and to determine what changes, if any, should be made to our product offerings and related underwriting.

The objective of our residential mortgage loan underwriting is to determine whether timely repayment of the debt can be expected and whether the property that secures the loan provides sufficient value to recover our investment in the event of a loan default. We review each loan individually utilizing such documents as the loan application, credit report, verification forms, tax returns and any other documents relevant and necessary to qualify the potential borrower for the loan. We analyze the credit and income profiles of potential borrowers and evaluate various aspects of the potential borrower’s credit history including credit scores. We do not base our underwriting decisions solely on credit scores. We consider the potential borrower’s income, liquidity, history of debt management and net worth. We perform income and debt ratio analyses as part of the credit underwriting process. Additionally, we obtain independent appraisals to establish collateral values to determine loan-to-value ratios. We use the same underwriting standards for our retail, broker and third party mortgage loan originations.

Our current policy on owner-occupied, residential mortgage loans in New York, Connecticut and Massachusetts is to lend up to 80% of the lesser of the purchase price or appraised value of the property securing the loan for loan amounts up to $1.0 million and up to 75% for loan amounts over $1.0 million and not more than $1.5 million. For select counties within New York, Connecticut and Massachusetts, our current policy is to lend up to 65% of the lesser of the purchase price or appraised value of the property securing the loan for loan amounts up to $2.0 million and up to 60% for loan amounts over $2.0 million and not more than $2.5 million. In all other approved states, our current policy on owner-occupied, residential mortgage loans is to lend up to 80% of the lesser of the purchase price or appraised value of the property securing the loan for loan amounts up to $1.0 million and up to 70% for loan amounts over $1.0 million and not more than $1.5 million. The exceptions to this policy are loans originated under our affordable housing program, which is consistent with our program for compliance with the Community Reinvestment Act, or CRA, loans originated under certain refinance programs offered only to existing qualified borrowers and loans originated for sale. See “Regulation and Supervision - Community Reinvestment” for further discussion of the CRA. Prior to the 2007 fourth quarter, our policy generally was to lend up to 80% of the appraised value of the property securing the loan and, for mortgage loans which had a loan-to-value ratio of greater than 80%, we required the mortgagor to obtain private mortgage insurance. In addition, we offered a variety of proprietary products which allowed the borrower to obtain financing of up to 90% loan-to-value without private mortgage insurance, through a combination of a first mortgage loan with an 80% loan-to-value and a home equity line of credit for the additional 10%. During the 2007 fourth quarter, we revised our policy on originations of owner-occupied, residential mortgage loans to discontinue lending amounts in excess of 80% of the appraised value of the property securing the loan and during the 2008 third quarter we revised our policy to discontinue lending amounts in excess of 75% of the appraised value of the property. During 2010, we revised our policy to the current limits, with certain exceptions, as noted above. We periodically review our loan product offerings and related underwriting and make changes as necessary in response to market conditions.

All of our hybrid ARM loans have annual and lifetime interest rate ceilings and floors. Such loans have, at times, been offered with an initial interest rate which is less than the fully indexed rate for the loan at the time of origination, referred to as a discounted rate. We determine the initial interest rate in accordance with market and competitive factors giving consideration to the spread over our funding sources in conjunction with our overall interest rate risk, or IRR, management strategies. In 2006, to recognize the credit risks associated with interest-only hybrid ARM loans, we began underwriting such loans based on a fully amortizing loan (in effect underwriting interest-only hybrid ARM loans as if they were amortizing hybrid ARM loans). Prior to 2007, we would underwrite our interest-only hybrid ARM loans using the initial note rate, which may have been a discounted rate. We monitor credit risk on interest-only hybrid ARM loans that were underwritten at the initial note rate, which may have been a discounted rate, in the same manner as we monitor credit risk on all interest-only hybrid ARM loans. Our portfolio of residential interest-only hybrid ARM loans which were underwritten at the initial note rate, which may have been a discounted rate, totaled $45.4 million, or 1% of our total residential mortgage loan portfolio, at December 31, 2016. In 2007, we began underwriting our

6


interest-only hybrid ARM loans at the higher of the fully indexed rate or the initial note rate. In 2009, we began underwriting our interest-only and amortizing hybrid ARM loans at the higher of the fully indexed rate, the initial note rate or 6.00%. During the 2010 second quarter, we reduced the underwriting interest rate floor from 6.00% to 5.00% to reflect the interest rate environment. During the 2010 third quarter we stopped offering interest-only loans.

In January 2014, we became subject to rules adding restrictions and requirements to mortgage origination and servicing practices. Under the rules, Qualified Mortgages are residential mortgage loans that meet standards prohibiting or limiting certain high risk products and features. Our current policy is to only originate mortgage loans that meet the requirements of a Qualified Mortgage. See “Regulation and Supervision - CFPB Regulation of Mortgage Origination and Servicing.”

Multi-Family and Commercial Real Estate Lending

Our primary multi-family and commercial real estate lending emphasis is on the origination of mortgage loans on rent controlled and rent stabilized apartment buildings located in the greater New York metropolitan area, including the five boroughs of New York City, Nassau, Suffolk and Westchester counties in New York, and parts of New Jersey and Connecticut. At December 31, 2016, multi-family mortgage loans totaled $4.05 billion, or 39% of our total loan portfolio, and commercial real estate loans totaled $729.3 million, or 7% of our total loan portfolio. 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 we currently offer generally include adjustable and fixed rate balloon loans with terms up to 15 years, amortized over 15 to 30 years. We also offer interest-only mortgage loans, primarily for loans secured by multi-family cooperative properties, to qualified borrowers, underwritten on an amortizing basis. Such loans generally require interest-only payments for the term of the loan, which generally ranges from five to ten years, and typically provide for a balloon payment at maturity. Interest-only loans represented less than 9% of our total multi-family and commercial real estate loan portfolio at December 31, 2016. Included in our multi-family and commercial real estate loan portfolios are mixed use loans secured by properties which are intended for both residential and commercial use. Mixed use loans are classified as multi-family or commercial real estate based on the respective percentage of income from residential and commercial uses.

Originations of multi-family and commercial real estate loans totaled $717.7 million during the year ended December 31, 2016 and $890.7 million during the year ended December 31, 2015. In originating multi-family and commercial real estate loans, we primarily consider the ability of the net operating income generated by the real estate to support the debt service, the financial resources, income level and managerial expertise of the borrower, the marketability of the property and our lending experience with the borrower. Our current policy for multi-family loans is to require a minimum debt service coverage ratio of 1.20 times and to finance up to 75% of the lesser of the purchase price or appraised value of the property securing the loan on purchases or 75% of the appraised value on refinances. For commercial real estate loans, our current policy is to require a minimum debt service coverage ratio of 1.25 times and to finance up to 70% of the lesser of the purchase price or appraised value of the property securing the loan on purchases or 70% of the appraised value on refinances. In addition, we perform analyses to determine the ability of the net operating income generated by the real estate to meet the debt service obligation under various stress scenarios.

The majority of the multi-family loans in our portfolio are secured by five to fifty-unit apartment buildings and mixed use properties (containing both residential and commercial uses). Commercial real estate loans are typically secured by retail, office and mixed use properties (more commercial than residential uses). The average balance of multi-family and commercial real estate loans originated during 2016 was $2.7 million. At December 31, 2016, our single largest multi-family credit had an outstanding balance of $36.0 million, was current and was secured by a 432-unit cooperative apartment building with 22 retail units in the Bronx. At December 31, 2016, the average balance of loans in our multi-family portfolio was approximately $1.9 million. At December 31, 2016, our single largest commercial real estate credit had an outstanding principal balance of $14.0 million, was current and was secured by a building with 100% commercial tenancy in Manhattan. At December 31, 2016, the average balance of loans in our commercial real estate portfolio was approximately $1.6 million.


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Multi-family and commercial real estate loans generally involve a greater degree of credit risk than residential loans because they typically have larger balances and are more affected by adverse conditions in the economy. As such, these loans require more ongoing evaluation and monitoring. Because payments on loans secured by multi-family properties and commercial real estate often depend upon the successful operation and management of the properties and the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulation. As we continue to grow our multi-family and commercial real estate loan portfolio, we continue to implement enhanced risk management policies, procedures and controls commensurate with the shift in our business focus to become a more fully diversified, full-service community bank.

Consumer and Other Loans

At December 31, 2016, $239.1 million, or 2%, of our total loan portfolio, consisted of consumer and other loans. Included in consumer and other loans at December 31, 2016 were $139.3 million of home equity and other consumer loans and $99.8 million of commercial and industrial loans.

Home equity and other consumer loans consist primarily of home equity lines of credit. Other consumer loans in this portfolio include overdraft protection, lines of credit and passbook loans which are primarily offered on a fixed rate, short-term basis. Home equity lines of credit are adjustable rate loans which are indexed to the prime rate and generally reset monthly. During the 2010 first quarter, we discontinued originating home equity lines of credit. In the 2014 fourth quarter, we resumed originations of home equity lines of credit, limited to an aggregate outstanding indebtedness secured by up to 80% of the appraised value of the property, up to a combined loan amount of $750,000 and up to 75% for loan amounts over $750,000 and not more than $1.0 million.

The underwriting standards we employ for consumer and other loans include a determination of the borrower’s payment history on other debts and an assessment of the borrower's ability to make payments on the proposed loan and other indebtedness. In addition to the creditworthiness of the borrower, the underwriting process also includes a review of the value of the collateral, if any, in relation to the proposed loan amount. In general, home equity and other consumer loans tend to have higher interest rates, shorter maturities and are considered to entail a greater risk of default than residential mortgage loans.

Commercial and industrial loans offered through our business banking operations primarily include secured lines of credit, equipment loans, letters of credit and term loans. All of our commercial and industrial loans at December 31, 2016 were originated in 2012 or later as part of our strategy to expand our business banking operations and diversify our earning assets. We focus on making commercial and industrial loans to small and medium-sized businesses, primarily located in our branch footprint, in a wide variety of industries. These loans are underwritten based upon the cash flow and earnings of the borrower and the value of the collateral securing such loans, if any.

Loan Approval Procedures and Authority

For individual loans with balances of $5.0 million or less or when the overall lending relationship is $60.0 million or less, loan approval authority has been delegated by the Board of Directors to various members of our underwriting and management staff. For individual loan amounts or overall lending relationships in excess of these amounts, loan approval authority has been delegated by the Board of Directors to members of our Executive Loan Committee, which consists of senior executive management.

For mortgage loans secured by residential properties, upon receipt of a completed application from a prospective borrower, we generally order a credit report, verify income and other information and, if necessary, obtain additional financial or credit related information. For mortgage loans secured by multi-family and commercial real estate properties, we obtain financial information concerning the operation of the property as well as credit information on the principal and borrower entity. Personal guarantees are generally not obtained with respect to multi-family and commercial real estate loans. An appraisal of the real estate used as collateral for mortgage loans is also obtained as part of the underwriting process. All appraisals are performed by licensed or certified appraisers, the majority of which

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are licensed independent third party appraisers. We have an internal appraisal review process to monitor third party appraisals. The Board of Directors annually reviews and approves our appraisal policy.

Loan Portfolio Composition

The following table sets forth the composition of our loan portfolio in dollar amounts and percentages of the portfolio at the dates indicated.
 
At December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
(Dollars in Thousands)
Amount
Percent of Total
 
Amount
Percent of Total
 
Amount
Percent of Total
 
Amount
Percent of Total
 
Amount
Percent of Total
Mortgage loans (gross):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
5,365,363

51.69
%
 
$
6,015,415

54.14
%
 
$
6,873,536

57.71
%
 
$
8,037,276

64.89
%
 
$
9,711,226

73.82
%
Multi-family
4,046,622

38.98

 
4,024,105

36.21

 
3,913,053

32.86

 
3,296,455

26.61

 
2,406,678

18.29

Commercial real estate
729,259

7.03

 
819,514

7.38

 
873,765

7.34

 
812,966

6.56

 
773,916

5.88

Total mortgage loans
10,141,244

97.70

 
10,859,034

97.73

 
11,660,354

97.91

 
12,146,697

98.06

 
12,891,820

97.99

Consumer and other loans (gross):
 
 
 
 

 
 
 

 
 
 

 
 
 

 
Home equity and other consumer
139,338

1.34

 
160,819

1.44

 
184,553

1.55

 
208,923

1.69

 
242,119

1.84

Commercial and industrial
99,776

0.96

 
91,874

0.83

 
64,815

0.54

 
30,758

0.25

 
21,975

0.17

Total consumer and other loans
239,114

2.30

 
252,693

2.27

 
249,368

2.09

 
239,681

1.94

 
264,094

2.01

Total loans (gross)
10,380,358

100.00
%
 
11,111,727

100.00
%
 
11,909,722

100.00
%
 
12,386,378

100.00
%
 
13,155,914

100.00
%
Net unamortized premiums and deferred loan origination costs
36,829

 
 
41,354

 
 
47,726

 
 
55,688

 
 
68,058

 
Loans receivable
10,417,187

 
 
11,153,081

 
 
11,957,448

 
 
12,442,066

 
 
13,223,972

 
Allowance for loan losses
(86,100
)
 
 
(98,000
)
 
 
(111,600
)
 
 
(139,000
)
 
 
(145,501
)
 
Loans receivable, net
$
10,331,087

 
 
$
11,055,081

 
 
$
11,845,848

 
 
$
12,303,066

 
 
$
13,078,471

 


9


Loan Maturity, Repricing and Activity

The following table shows the contractual maturities of our loans receivable at December 31, 2016 and does not reflect the effect of prepayments or scheduled principal amortization.
 
At December 31, 2016
(In Thousands)
Residential
 
Multi-
Family
 
Commercial
Real Estate
 
Consumer
and
Other
 
Total
Amount due:
 

 
 

 
 
 

 
 
 
 

 
 
 

Within one year
$
4,416

 
$
173,981

 
 
$
84,979

 
 
 
$
63,774

 
 
$
327,150

After one year:
 

 
 

 
 
 

 
 
 
 

 
 
 

Over one to three years
12,226

 
308,480

 
 
147,728

 
 
 
6,122

 
 
474,556

Over three to five years
20,322

 
366,425

 
 
94,795

 
 
 
25,167

 
 
506,709

Over five to ten years
318,526

 
1,994,973

 
 
241,405

 
 
 
12,337

 
 
2,567,241

Over ten to twenty years
2,095,388

 
1,193,659

 
 
159,687

 
 
 
98,780

 
 
3,547,514

Over twenty years
2,914,485

 
9,104

 
 
665

 
 
 
32,934

 
 
2,957,188

Total due after one year
5,360,947

 
3,872,641

 
 
644,280

 
 
 
175,340

 
 
10,053,208

Total amount due
$
5,365,363

 
$
4,046,622

 
 
$
729,259

 
 
 
$
239,114

 
 
$
10,380,358

Net unamortized premiums and
deferred loan origination costs
 

 
 

 
 
 

 
 
 
 

 
 
36,829

Allowance for loan losses
 

 
 

 
 
 

 
 
 
 

 
 
(86,100
)
Loans receivable, net
 

 
 

 
 
 

 
 
 
 

 
 
$
10,331,087


The following table sets forth at December 31, 2016, the dollar amount of our loans receivable contractually maturing after December 31, 2017, and whether such loans have fixed interest rates or adjustable interest rates.  Our interest-only and amortizing hybrid ARM loans are classified as adjustable rate loans.
 
Maturing After December 31, 2017
(In Thousands)  
Fixed
 
Adjustable
 
Total
Mortgage loans:
 

 
 

 
 

Residential
$
1,937,196

 
$
3,423,751

 
$
5,360,947

Multi-family
2,160,895

 
1,711,746

 
3,872,641

Commercial real estate
382,266

 
262,014

 
644,280

Consumer and other loans
42,669

 
132,671

 
175,340

Total
$
4,523,026

 
$
5,530,182

 
$
10,053,208



10


The following table sets forth our loan originations, purchases, sales and principal repayments for the periods indicated, including loans held-for-sale.
 
For the Year Ended December 31,
(In Thousands)  
2016
 
2015
 
2014
Mortgage loans (gross) (1):
 

 
 

 
 

Balance at beginning of year
$
10,867,990

 
$
11,667,994

 
$
12,154,132

Originations:
 

 
 
 
 

Residential
519,757

 
517,618

 
366,792

Multi-family
662,328

 
784,063

 
1,012,150

Commercial real estate
55,355

 
106,616

 
174,341

Total originations
1,237,440

 
1,408,297

 
1,553,283

Purchases (2)
373,882

 
227,034

 
194,237

Principal repayments
(2,182,349
)
 
(2,291,194
)
 
(1,887,465
)
Sales
(128,617
)
 
(135,365
)
 
(286,522
)
Transfer of loans to real estate owned
(13,239
)
 
(7,783
)
 
(43,448
)
Net loans charged off
(2,248
)
 
(993
)
 
(16,223
)
Balance at end of year
$
10,152,859

 
$
10,867,990

 
$
11,667,994

Consumer and other loans (gross):
 

 
 

 
 

Balance at beginning of year
$
252,693

 
$
249,368

 
$
239,681

Originations and advances
133,457

 
162,943

 
109,208

Principal repayments
(146,535
)
 
(159,083
)
 
(97,813
)
Net loans charged off
(501
)
 
(535
)
 
(1,708
)
Balance at end of year
$
239,114

 
$
252,693

 
$
249,368

(1)
Includes loans classified as held-for-sale totaling $11.6 million at December 31, 2016, $9.0 million at December 31, 2015 and $7.6 million at December 31, 2014.
(2)
Purchases of mortgage loans represent third party loan originations and are secured by residential properties.

Asset Quality

General

One of our key operating objectives has been and continues to be to maintain a high level of asset quality. We continue to employ sound underwriting standards for new loan originations. Through a variety of strategies, including, but not limited to, collection efforts and the marketing of delinquent and non-performing loans and foreclosed properties, we have been proactive in addressing problem and non-performing assets which, in turn, has helped to maintain the strength of our financial condition.

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

Non-performing Assets

Non-performing assets, which include non-performing loans and real estate owned, or REO, totaled $163.4 million at December 31, 2016, compared with $158.0 million at December 31, 2015, reflecting an increase in non-performing loans, partially offset by a decline in REO, net. Non-performing loans, which are comprised primarily of mortgage

11


loans, include all non-accrual loans, and, to a lesser extent, mortgage loans past due 90 days or more and still accruing interest, and exclude loans held-for-sale and loans modified in a troubled debt restructuring, or TDR, which have been returned to accrual status. At December 31, 2016, non-performing loans totaled $148.2 million, up $10.0 million compared to $138.2 million at December 31, 2015. The ratio of non-performing assets to total assets was 1.12% at December 31, 2016, compared to 1.05% at December 31, 2015. The ratio of non-performing loans to total loans increased to 1.42% at December 31, 2016, from 1.24% at December 31, 2015. The allowance for loan losses as a percentage of total non-performing loans decreased to 58.1% at December 31, 2016, from 70.9% at December 31, 2015. At December 31, 2016 REO, net, totaled $15.1 million, down $4.7 million, compared to $19.8 million at December 31, 2015. For further discussion of our non-performing assets, non-performing loans and the allowance for loan losses, see Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” or “MD&A.”

We may agree, in certain instances, to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a TDR. Modifications as a result of a TDR may include, but are not limited to, interest rate modifications, payment deferrals, restructuring of payments to interest-only from amortizing and/or extensions of maturity dates. Modifications which result in insignificant payment delays and payment shortfalls are generally not classified as a TDR. Residential mortgage loans discharged in a Chapter 7 bankruptcy filing, or bankruptcy loans, are also reported as loans modified in a TDR as relief granted by a court is also viewed as a concession to the borrower in the loan agreement. Loans modified in a TDR are individually classified as impaired and are initially placed on non-accrual status regardless of their delinquency status and remain in non-accrual status until we determine that future collection of principal and interest is reasonably assured. Where we have agreed to modify the contractual terms of a borrower’s loan, we require the borrower to demonstrate performance according to the restructured terms, generally for a period of at least six months, prior to returning the loan to accrual status. Loans modified in a TDR which have been returned to accrual status are excluded from non-performing loans but remain classified as impaired. Loans modified in a TDR which are included in non-performing loans totaled $58.6 million at December 31, 2016 and $61.0 million at December 31, 2015, of which $38.0 million at December 31, 2016 and $47.6 million at December 31, 2015 were current or less than 90 days past due. Restructured accruing loans totaled $84.1 million at December 31, 2016 and $101.8 million at December 31, 2015. For further detail on loans modified in a TDR, see Note 1 and Note 5 in Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

We discontinue accruing interest on loans when they become 90 days past due as to their payment due date and at the time a loan is deemed a TDR. We may also discontinue accruing interest on certain other loans earlier because of deterioration in financial or other conditions of the borrower. 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, presuming we deem the remaining recorded investment in the loan to be fully collectible, income is recognized only to the extent cash is received until a return to accrual status is warranted. In some circumstances, mortgage loans will reach their maturity date with the borrower having an intent to refinance. If such loans become 30 days past maturity, we continue to consider such loans as current to the extent such borrowers continue to make monthly payments to us consistent with the original terms of the loan, and where we do not have a reason to believe that any loss will be incurred on the loan, in which case we continue to accrue interest. In other cases, we may defer recognition of income until the principal balance has been recovered. At December 31, 2016 there was one multi-family mortgage loan for $1.2 million that was 30 days past maturity, where the borrower had an intent and ability to refinance, classified as current. There were no loans 30 days past maturity at December 31, 2015. Should a loan reach 60 days past maturity we then classify such loan as past due. There were no loans 60 days past maturity at either December 31, 2016 or 2015.

We obtain updated estimates of collateral values on residential mortgage loans at 180 days past due and earlier in certain instances, including for loans to borrowers who have filed for bankruptcy, and, to the extent the loans remain delinquent, annually thereafter. Updated estimates of collateral values on residential loans are obtained primarily through automated valuation models. Additionally, our loan servicer performs property inspections to monitor and manage the collateral on our residential loans when they become 45 days past due and monthly thereafter until the foreclosure process is complete. We obtain updated estimates of collateral value using third party appraisals on non-

12


performing multi-family and commercial real estate mortgage loans when the loans initially become non-performing and annually thereafter and multi-family and commercial real estate loans modified in a TDR at the time of the modification and annually thereafter. Appraisals on multi-family and commercial real estate loans are reviewed by our internal certified appraisers. We analyze our home equity lines of credit when such loans become 90 days past due and consider our lien position, the estimated fair value of the underlying collateral value and the results of recent property inspections in determining the need for an individual valuation allowance. We also obtain updated estimates of collateral value for certain other loans when the Asset Classification Committee believes repayment of such loans may be dependent on the value of the underlying collateral. Adjustments to final appraised values obtained from independent third party appraisers and automated valuation models are not made.

We proactively manage our non-performing assets, in part, through the sale of certain individual delinquent and non-performing loans. During the year ended December 31, 2016, we sold $2.9 million, net of charge-offs of $672,000, of delinquent and non-performing mortgage loans, primarily multi-family and commercial real estate mortgage loans. At December 31, 2016, included in loans held-for-sale, net, was one non-performing multi-family mortgage loan totaling $143,000. Such non-performing loans held-for-sale are excluded from non-performing loans, non-performing assets and related ratios.

REO represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is initially recorded at estimated fair value less estimated selling costs. Thereafter, we maintain a valuation allowance, representing decreases in the properties’ estimated fair value, through charges to earnings. Such charges are included in other non-interest expense along with any additional property maintenance and protection expenses incurred in owning the property. Fair value is estimated through current appraisals, in conjunction with a drive-by inspection and comparison of the REO property with similar properties in the area by either a licensed appraiser or real estate broker. As these properties are actively marketed, estimated fair values are periodically adjusted by management to reflect current market conditions. At December 31, 2016, we held 50 properties in REO totaling $15.1 million, net of a valuation allowance of $1.2 million, all of which were residential properties. At December 31, 2015, we held 50 properties in REO totaling $19.8 million, net of a valuation allowance of $1.3 million, $17.8 million of which were residential properties.

Criticized and Classified Assets

Our Asset Review Department reviews and classifies our assets and independently reports the results of its reviews to the Loan Committee of our Board of Directors quarterly. Our Asset Classification Committee establishes policy relating to the internal classification of loans and also provides input to the Asset Review Department in its review of our assets. Federal regulations and our policy require the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as special mention, substandard, doubtful or loss. An asset criticized as special mention has potential weaknesses, which, if uncorrected, may result in the deterioration of the repayment prospects or in our credit position at some future date. An asset classified as substandard is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses present make collection or liquidation in full satisfaction of the loan amount, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Those assets classified as substandard, doubtful or loss are considered adversely classified.

Impaired Loans

We evaluate loans individually for impairment in connection with our individual loan review and asset classification process. In addition, residential mortgage loans are individually evaluated for impairment at 180 days past due and earlier in certain instances, including for loans to borrowers who have filed for bankruptcy, and, to the extent the loans remain delinquent, annually thereafter.


13


A loan is considered impaired when, based upon current information and events, it is probable we will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include the financial condition of the borrower, payment history, delinquency status, collateral value, our lien position and the probability of collecting principal and interest payments when due. When an impairment analysis indicates the need for a specific allocation of the allowance on an individual loan, such allocation would be established sufficient to cover probable incurred losses at the evaluation date based on the facts and circumstances of the loan. When available information confirms that specific loans, or portions thereof, are uncollectible, these amounts are charged-off against the allowance for loan losses. For loans individually classified as impaired, the portion of the recorded investment in the loan in excess of either the estimated fair value of the underlying collateral less estimated selling costs, for collateral dependent loans, the observable market price of the loan or the present value of the discounted cash flows of a modified loan, is generally charged-off.

Impaired loans totaled $204.3 million, net of their related allowance for loan losses of $9.4 million, at December 31, 2016 and $222.7 million, net of their related allowance for loan losses of $14.8 million, at December 31, 2015. Interest income recognized on impaired loans amounted to $7.2 million for the year ended December 31, 2016. For further detail on our impaired loans, see Note 1 and Note 5 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

Allowance for Loan Losses

For a discussion of our accounting policy related to the allowance for loan losses, see “Critical Accounting Policies - Allowance for Loan Losses” in Item 7, “MD&A.”

In addition to the requirements of U.S. generally accepted accounting principles, or GAAP, related to loss contingencies, a federally chartered savings association’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OCC. The OCC, 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 valuation 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 collectability 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 our estimates at December 31, 2016. In addition, there can be no assurance that the OCC or other regulators, as a result of reviewing our loan portfolio and/or allowance, will not request that we alter our allowance for loan losses, thereby affecting our financial condition and earnings.

Investment Activities

General

Our investment policy is designed to complement our lending activities, generate a favorable return within established risk guidelines which limit interest rate and credit risk, assist in the management of IRR and provide a source of liquidity. In establishing our investment strategies, we consider our business plans, the economic environment, our interest rate sensitivity position, the types of securities held and other factors.

Federally chartered savings associations have authority to invest in various types of assets, including U.S. Treasury obligations; securities of government agencies and GSEs; mortgage-backed securities, including collateralized mortgage obligations, or CMOs, and real estate mortgage investment conduits, or REMICs; certain certificates of deposit of insured banks and federally chartered savings associations; certain bankers acceptances; and, subject to certain limits, corporate securities, commercial paper and mutual funds. Our investment policy also permits us to invest in certain derivative financial instruments. We do not use derivatives for trading purposes. As a member of the

14


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

Securities

At December 31, 2016, our securities portfolio totaled $3.02 billion, or 21% of total assets, and was comprised primarily of mortgage-backed securities. At December 31, 2016, our mortgage-backed securities, which were primarily collateralized by residential mortgage loans, totaled $2.53 billion, or 84% of total securities, of which $2.29 billion, or 76% of total securities, were REMIC and CMO securities. Substantially all of our REMIC and CMO securities had fixed interest rates and were guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae as issuer, with the balance of this portfolio comprised of privately issued securities, which were primarily investment grade securities. In addition to our REMIC and CMO securities, at December 31, 2016, we had $237.9 million, or 8% of total securities, in mortgage-backed pass-through certificates guaranteed by either Fannie Mae, Freddie Mac or Ginnie Mae. These securities provide liquidity, collateral for borrowings and minimal credit risk while providing appropriate returns and are an attractive alternative to other investments due to the wide variety of maturity and repayment options available.

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

In addition to mortgage-backed securities, at December 31, 2016, we had $493.5 million of other securities, consisting primarily of obligations of GSEs which, by their terms, may be called by the issuer, typically after the passage of a fixed period of time. At December 31, 2016, the amortized cost of callable securities totaled $374.3 million. During the year ended December 31, 2016, 19 securities with a carrying value of $354.6 million were called. In addition, we had $80.0 million of corporate debt securities that were all investment grade securities.

Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Reform Act, and the final implementing rules, among other things, prohibits banking entities from acquiring and retaining an ownership interest in, sponsoring, or having certain relationships with a “covered fund.” We do not own any securities or have an ownership interest in any funds that are not permitted under the Reform Act. For further discussion, see “Regulation and Supervision - Federally Chartered Savings Association Regulation - Business Activities.”

At December 31, 2016, our securities available-for-sale totaled $280.0 million and our securities held-to-maturity totaled $2.74 billion. For further discussion of our securities portfolio, see Item 7, “MD&A,” Note 1 and Note 3 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data,” and the tables that follow.


15


The following table sets forth the composition of our available-for-sale and held-to-maturity securities portfolios at their respective carrying values in dollar amounts and percentages of the portfolios at the dates indicated.  Our available-for-sale securities portfolio is carried at estimated fair value and our held-to-maturity securities portfolio is carried at amortized cost.
 
At December 31,
 
2016
 
2015
 
2014
(Dollars in Thousands)
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
Securities available-for-sale:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

GSE issuance REMICs and CMOs
$
240,793

 
85.98
%
 
$
330,539

 
79.31
%
 
$
268,998

 
69.99
%
Non-GSE issuance REMICs and CMOs
1,443

 
0.52

 
3,054

 
0.73

 
5,104

 
1.33

GSE pass-through certificates
8,930

 
3.19

 
11,264

 
2.70

 
13,557

 
3.53

Obligations of GSEs
28,875

 
10.31

 
71,939

 
17.26

 
96,698

 
25.16

Fannie Mae stock
4

 

 
2

 

 
2

 

Total securities available-for-sale
$
280,045

 
100.00
%
 
$
416,798

 
100.00
%
 
$
384,359

 
100.00
%
Securities held-to-maturity:
 
 
 
 
 

 
 

 
 

 
 

Residential mortgage-backed securities:
 
 
 
 
 

 
 

 
 

 
 

GSE issuance REMICs and CMOs
$
1,119,175

 
40.84
%
 
$
1,361,907

 
59.30
%
 
$
1,575,402

 
73.83
%
Non-GSE issuance REMICs and CMOs
193

 
0.01

 
198

 
0.01

 
2,482

 
0.12

GSE pass-through certificates
228,976

 
8.36

 
260,707

 
11.35

 
281,685

 
13.20

Multi-family mortgage-backed securities:
 
 


 
 
 


 
 
 


     GSE issuance REMICs
927,119

 
33.83

 
434,587

 
18.92

 
154,381

 
7.24

Obligations of GSEs
384,325

 
14.03

 
178,967

 
7.79

 
119,336

 
5.59

Corporate debt securities
80,000

 
2.92

 
60,000

 
2.61

 

 

Other
344

 
0.01

 
433

 
0.02

 
518

 
0.02

Total securities held-to-maturity
$
2,740,132

 
100.00
%
 
$
2,296,799

 
100.00
%
 
$
2,133,804

 
100.00
%


16


The following contractual maturity table sets forth certain information regarding the amortized costs, estimated fair values and weighted average yields of our FHLB-NY stock, securities available-for-sale and securities held-to-maturity at December 31, 2016 and does not reflect the effect of prepayments or scheduled principal amortization on our REMICs, CMOs and pass-through certificates or the effect of callable features on our obligations of GSEs.
 
Within One Year
 
Over One to Five Years
 
Over Five to Ten Years
 
Over Ten Years
 
Total Securities
(Dollars in Thousands)
Amortized
Cost
Weighted
Average
Yield
 
Amortized
Cost
Weighted
Average
Yield
 
 
Amortized
Cost
Weighted
Average
Yield
 
Amortized
Cost
Weighted
Average
Yield
 
Amortized
Cost
 
Estimated
Fair
Value
 
Weighted
Average
Yield
FHLB-NY stock (1)(2)
 
$

 
 
%
 
 
 
$

 
 
%
 
 
 
 
$

 
 
%
 
 
$
124,807

 
5.00
%
 
 
$
124,807

 
$
124,807

 
 
5.00
%
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential REMICs and CMOs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE issuance
 
$

 
 
%
 
 
 
$
326

 
 
4.25
%
 
 
 
 
$
3,643

 
 
3.72
%
 
 
$
238,203

 
2.46
%
 
 
$
242,172

 
$
240,793

 
 
2.48
%
 
Non-GSE issuance
 

 
 

 
 
 
1,407

 
 
3.28

 
 
 
 
35

 
 
3.06

 
 

 

 
 
1,442

 
1,443

 
 
3.27

 
GSE pass-through certificates
 
4

 
 
5.26

 
 
 
254

 
 
2.55

 
 
 
 
3,952

 
 
2.66

 
 
4,361

 
2.93

 
 
8,571

 
8,930

 
 
2.80

 
Obligations of
GSEs (3)
 

 
 

 
 
 

 
 

 
 
 
 
30,000

 
 
2.47

 
 

 

 
 
30,000

 
28,875

 
 
2.47

 
Fannie Mae
stock (1)(4)
 

 
 

 
 
 

 
 

 
 
 
 

 
 

 
 
15

 

 
 
15

 
4

 
 

 
Total securities available-for-sale
 
$
4

 
 
5.26
%
 
 
 
$
1,987

 
 
3.35
%
 
 
 
 
$
37,630

 
 
2.61
%
 
 
$
242,579

 
2.47
%
 
 
$
282,200

 
$
280,045

 
 
2.49
%
 
Securities held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential REMICs and CMOs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE issuance
 
$

 
 
%
 
 
 
$
1,041

 
 
1.51
%
 
 
 
 
$
50,638

 
 
2.90
%
 
 
$
1,067,496

 
2.38
%
 
 
$
1,119,175

 
$
1,112,114

 
 
2.40
%
 
Non-GSE issuance
 

 
 

 
 
 

 
 

 
 
 
 

 
 

 
 
193

 
4.75

 
 
193

 
186

 
 
4.75

 
GSE pass-through certificates
 

 
 

 
 
 
13

 
 
9.53

 
 
 
 
2,612

 
 
1.52

 
 
226,351

 
2.18

 
 
228,976

 
226,359

 
 
2.17

 
Multi-family REMICs - GSE issuance
 

 
 

 
 
 

 
 

 
 
 
 

 
 

 
 
927,119

 
2.41

 
 
927,119

 
908,192

 
 
2.41

 
Obligations of
GSEs (3)
 
39,987

 
 
0.44

 
 
 
16,400

 
 
2.47

 
 
 
 
260,053

 
 
2.36

 
 
67,885

 
2.37

 
 
384,325

 
367,869

 
 
2.17

 
Corporate debt securities
 

 
 

 
 
 

 
 

 
 
 
 
70,000

 
 
3.65

 
 
10,000

 
4.00

 
 
80,000

 
75,482

 
 
3.69

 
Other
 

 
 

 
 
 
343

 
 
7.25

 
 
 
 

 
 

 
 
1

 
7.00

 
 
344

 
344

 
 
7.25

 
Total securities held-to-maturity
 
$
39,987

 
 
0.44
%
 
 
 
$
17,797

 
 
2.51
%
 
 
 
 
$
383,303

 
 
2.66
%
 
 
$
2,299,045

 
2.38
%
 
 
$
2,740,132

 
$
2,690,546

 
 
2.39
%
 
(1)
Equity securities have no stated maturities and are therefore classified in the over ten years category.
(2)
The carrying amount of FHLB-NY stock equals cost.  The weighted average yield represents the 2016 third quarter annualized dividend rate declared by the FHLB-NY in November 2016.
(3)
Callable in 2017 and at various times thereafter.
(4)
The weighted average yield of Fannie Mae stock reflects the Federal Housing Finance Agency decision to suspend dividend payments indefinitely.

The following table sets forth the aggregate amortized cost and estimated fair value of our securities where the aggregate amortized cost of securities from a single issuer exceeds 10% of our stockholders’ equity at December 31, 2016.
(In Thousands)
Amortized Cost
 
Estimated Fair Value
Fannie Mae
$
910,519

 
$
901,022

Freddie Mac
654,700

 
651,011

Federal Farm Credit Bank
262,740

 
251,150



17


Sources of Funds

General

Our primary sources of funds are the cash flows provided by our deposit gathering activities and investing activities, including principal and interest payments on loans and securities. Our other sources of funds are provided by operating activities (primarily net income) and borrowing activities.

Deposits

We offer a variety of deposit accounts with a range of interest rates and terms. We presently offer NOW and demand deposit accounts, money market accounts, passbook and statement savings accounts and certificates of deposit. At December 31, 2016, our deposits totaled $8.88 billion. Of the total deposit balance, $720.1 million, or 8%, represent Individual Retirement Accounts. We held no brokered deposits at December 31, 2016.

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

Core deposits represented 82% of total deposits at December 31, 2016. Our core deposit growth strategy includes focusing on individual customer relationships and on small and middle market businesses. Total deposits included $1.09 billion of business deposits at December 31, 2016, substantially all of which were core deposits, reflecting the expansion of our business banking operations, a component of the strategic shift in our balance sheet.

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

The following table presents our deposit activity for the periods indicated.
 
For the Year Ended December 31,
(Dollars in Thousands)  
2016
 
2015
 
2014
Opening balance
$
9,106,027

 
$
9,504,909

 
$
9,855,310

Net withdrawals
(255,871
)
 
(436,225
)
 
(401,756
)
Interest credited
26,899

 
37,343

 
51,355

Ending balance
$
8,877,055

 
$
9,106,027

 
$
9,504,909

Net decrease
$
228,972

 
$
398,882

 
$
350,401

Percentage decrease
2.51
%
 
4.20
%
 
3.56
%


18


The following table sets forth the maturity periods of our certificates of deposit in amounts of $250,000 or more at December 31, 2016.
(In Thousands)
Amount
Within three months
$
13,963

Over three to six months
8,533

Over six to twelve months
6,834

Over twelve months
52,348

Total
$
81,678


The following table sets forth the distribution of our average deposit balances for the periods indicated and the weighted average interest rates for each category of deposit presented.
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
(Dollars in Thousands)
Average
Balance
 
Percent
of Total
 
Weighted
Average
Rate
 
Average
Balance
 
Percent
of Total
 
Weighted
Average
Rate
 
Average
Balance
 
Percent
of Total
 
Weighted
Average
Rate
NOW
$
1,402,498

 
15.67
%
 
 
0.06
%
 
 
$
1,342,958

 
14.60
%
 
 
0.06
%
 
 
$
1,236,760

 
12.82
%
 
 
0.06
%
 
Non-interest bearing NOW and demand deposit
1,043,511

 
11.66

 
 

 
 
928,022

 
10.09

 
 

 
 
897,517

 
9.30

 
 

 
Money market
2,667,905

 
29.81

 
 
0.28

 
 
2,459,170

 
26.73

 
 
0.26

 
 
2,187,718

 
22.68

 
 
0.25

 
Savings
2,099,651

 
23.46

 
 
0.05

 
 
2,186,704

 
23.77

 
 
0.05

 
 
2,364,679

 
24.52

 
 
0.05

 
Total
7,213,565

 
80.60

 
 
0.13

 
 
6,916,854

 
75.19

 
 
0.12

 
 
6,686,674

 
69.32

 
 
0.11

 
Certificates of deposit (1):
 

 
 

 
 
 

 
 
 

 
 

 
 
 

 
 
 

 
 

 
 
 

 
Within one year
315,796

 
3.53

 
 
0.07

 
 
404,862

 
4.40

 
 
0.07

 
 
508,160

 
5.27

 
 
0.07

 
Over one to three years
519,950

 
5.81

 
 
0.79

 
 
605,168

 
6.58

 
 
0.74

 
 
890,318

 
9.23

 
 
0.83

 
Over three to five years
896,995

 
10.02

 
 
1.48

 
 
1,267,179

 
13.78

 
 
1.91

 
 
1,552,188

 
16.09

 
 
2.33

 
Over five years
1,070

 
0.01

 
 
1.78

 
 
1,285

 
0.01

 
 
1.71

 
 
901

 
0.01

 
 
1.66

 
Jumbo
2,357

 
0.03

 
 
0.13

 
 
3,544

 
0.04

 
 
0.11

 
 
8,064

 
0.08

 
 
0.14

 
Total
1,736,168

 
19.40

 
 
1.02

 
 
2,282,038

 
24.81

 
 
1.27

 
 
2,959,631

 
30.68

 
 
1.48

 
Total deposits
$
8,949,733

 
100.00
%
 
 
0.30
%
 
 
$
9,198,892

 
100.00
%
 
 
0.41
%
 
 
$
9,646,305

 
100.00
%
 
 
0.53
%
 
(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, 2016 and the balances of our certificates of deposit outstanding at December 31, 2016, 2015 and 2014.
 
Period to Maturity From December 31, 2016
 
At December 31,
(In Thousands)
Within
One Year
 
Over One
to
Two Years
Over Two
to
Three Years
Over
Three
Years
 
2016
 
2015
 
2014
Certificates of deposit rate categories:
 

 
 

 
 

 
 

 
 

 
 

 
 

0.49% or less
$
354,639

 
$
3,940

 
$
30

 
$

 
$
358,609

 
$
556,770

 
$
763,913

0.50% to 0.99%
79,635

 
90,628

 
15,495

 
927

 
186,685

 
148,423

 
96,535

1.00% to 1.99%
240,384

 
172,525

 
186,440

 
455,496

 
1,054,845

 
978,058

 
910,355

2.00% to 2.99%
346

 
22

 
3

 
79

 
450

 
310,441

 
502,012

3.00% to 3.99%
12

 
106

 
32

 

 
150

 
360

 
422,391

4.00% and over

 
125

 

 

 
125

 
130

 
300

Total
$
675,016

 
$
267,346

 
$
202,000

 
$
456,502

 
$
1,600,864

 
$
1,994,182

 
$
2,695,506



19


Borrowings

Borrowings are used as a complement to deposit gathering as a funding source for asset growth and are an integral part of our IRR management strategy. We utilize federal funds purchased and we enter into sales of securities sold under agreements to repurchase, or repo agreements, transactions with approved securities dealers and banks, and the FHLB-NY. Repo agreements are accounted for as borrowings and are secured by the securities sold under the agreements. We also obtain overnight and term advances from the FHLB-NY. At December 31, 2016, FHLB-NY advances totaled $2.09 billion, or 58% of total borrowings. Such advances are generally secured by a blanket lien against, among other things, our residential mortgage loan portfolio and our investment in FHLB-NY stock. The maximum amount that the FHLB-NY will advance, for purposes other than for meeting withdrawals, fluctuates from time to time in accordance with the policies of the FHLB-NY. See “Regulation and Supervision - Federal Home Loan Bank System.” Occasionally, we will obtain funds through the issuance of unsecured debt obligations. These obligations are classified as other borrowings in our consolidated statements of financial condition. At December 31, 2016, borrowings totaled $3.63 billion.

Included in our borrowings are various obligations which, by their terms, may be called by the counterparty. At December 31, 2016, we had $1.95 billion of callable borrowings, all of which were contractually callable by the counterparty within one year and on a quarterly basis thereafter. We believe the potential for these borrowings to be called does not present a liquidity concern as they have above current market coupons and, as such, are not likely to be called absent a significant increase in market interest rates. In addition, to the extent such borrowings were to be called, we believe we can readily obtain replacement funding, although such funding may be at higher rates.

For further information regarding our borrowings, including our borrowings outstanding, average borrowings, maximum borrowings and weighted average interest rates at and for each of the years ended December 31, 2016, 2015 and 2014, see Item 7, “MD&A,” and Note 8 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

Market Area and Competition

Astoria Bank 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, internet and mobile banking capabilities. We consider our strong retail banking network, together with our reputation for financial strength and customer service, as well as our competitive pricing, as our major strengths in attracting and retaining customers in our market areas. Our business banking operations also generate new core relationships within the communities we serve and deepen our existing relationships.

Astoria Bank’s deposit gathering sources are primarily concentrated in the communities surrounding Astoria Bank’s banking offices in Queens, Kings (Brooklyn), Nassau, Suffolk, Westchester and New York (Manhattan) counties of New York. Astoria Bank ranked eighth in deposit market share in the Long Island market, which includes the counties of Queens, Kings, Nassau and Suffolk, with a 4% market share based on the annual Federal Deposit Insurance Corporation, or FDIC, “Summary of Deposits - Market Share Report” dated June 30, 2016.

Astoria Bank originates multi-family and commercial real estate loans, primarily on rent controlled and rent stabilized apartment buildings located in the greater New York metropolitan area and originates residential mortgage loans through its banking and loan production offices in New York, through a broker network covering four states, primarily along the East Coast, and through a third party loan origination program covering 13 states and the District of Columbia. Our various loan origination programs provide efficient and diverse delivery channels for deployment of our cash flows. Additionally, our broker and third party residential loan origination programs provide geographic diversification, reducing our exposure to concentrations of credit risk.

The New York metropolitan area has a high density of financial institutions, a number of which are significantly larger and have greater financial resources than we have. Our competition for loans, both locally and nationally, comes

20


principally from commercial banks, savings banks, savings and loan associations, mortgage banking companies and credit unions. U.S. government activism in banking and mortgage banking, through regulation and examination, a sustained, low interest rate environment and rapidly evolving traditional and non-traditional competition in our marketplace, have combined to adversely impact current and projected operating results. The U.S. government's intervention in the mortgage and credit markets has resulted in a narrowing of mortgage spreads, lower yields and accelerated mortgage prepayments. We have expanded our multi-family and commercial real estate lending and business banking operations. These business lines are also being aggressively pursued by a number of competitors, both large and small. Our most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. We also face competition for deposits from money market mutual funds and other corporate and government securities funds as well as from other financial intermediaries such as brokerage firms and insurance companies. In December 2016, the OCC announced that it would begin considering applications from financial technology companies to become special purpose national banks. In addition, as customer preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems.

Subsidiary Activities

We have two direct wholly-owned subsidiaries, Astoria Bank and AF Insurance Agency, Inc., which are reported on a consolidated basis. AF Insurance Agency, Inc. is a licensed life insurance agency which, through contractual agreements with various third parties, makes insurance products available primarily to the customers of Astoria Bank.

At December 31, 2016, the following were wholly-owned subsidiaries of Astoria Bank and are reported on a consolidated basis.

AF Agency, Inc. was formed in 1990 and makes various annuity products available primarily to the customers of Astoria Bank through an unaffiliated third party vendor. Astoria Bank is reimbursed for expenses it incurs on behalf of AF Agency, Inc. Fees generated by AF Agency, Inc. totaled $2.0 million for the year ended December 31, 2016.

Astoria Federal Mortgage Corp. is an operating subsidiary through which Astoria Bank engages in lending activities primarily outside the State of New York through our third party loan origination program.

Astoria Federal Savings and Loan Association Revocable Grantor Trust was formed in November 2000 in connection with the establishment of a BOLI program by Astoria Bank. Premiums paid to purchase BOLI in 2000 and 2002 totaled $350.0 million. The carrying amount of our investment in BOLI was $441.1 million, or 3% of total assets, at December 31, 2016. See Note 1 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data,” for further discussion of BOLI.

Fidata Service Corp., or Fidata, was incorporated in the State of New York in November 1982. Fidata qualified as a Connecticut passive investment company and for alternative tax treatment, through 2014, under Article 9A of the New York State, or NYS, tax law. Fidata maintains offices in Norwalk, Connecticut and invests in loans secured by real property which qualify as intangible investments permitted to be held by a Connecticut passive investment company. Fidata held mortgage loans totaling $2.55 billion at December 31, 2016.

Marcus I Inc. was incorporated in the State of New York in April 2006 and was formed to serve as assignee of certain loans in default and REO properties. Marcus I Inc. assets were not material to our financial condition at December 31, 2016.

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

Astoria Bank has four additional subsidiaries, one of which is a single purpose entity that has an interest in a real estate investment which is not material to our financial condition and the remaining three are inactive and have no assets.


21


Personnel

As of December 31, 2016, we had 1,328 full-time employees and 98 part-time employees, or 1,377 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 Bank is subject to extensive regulation, examination and supervision by the OCC, as its primary federal regulator, and by the FDIC, as its deposit insurer. We, as a unitary savings and loan holding company, are regulated, examined and supervised by the FRB and are subject to FRB reporting requirements. Astoria Bank is a member of the FHLB-NY and its deposit accounts are insured up to applicable limits by the FDIC under the Deposit Insurance Fund, or DIF. Astoria Bank must file reports with the OCC concerning its 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 OCC periodically performs safety and soundness examinations of Astoria Bank and tests its compliance with various regulatory requirements. The FDIC reserves the right to do so as well. The OCC has primary enforcement responsibility over Astoria Bank and has substantial discretion to impose enforcement actions if Astoria Bank 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 OCC that enforcement action be taken with respect to Astoria Bank and, if action is not taken by the OCC, the FDIC has authority to take such action under certain circumstances.

We are also subject to examination, regulation and supervision by the CFPB, which is authorized to supervise certain consumer financial services companies and insured depository institutions with more than $10 billion in total assets, such as Astoria Bank, for consumer protection purposes. The CFPB has exclusive examination and primary enforcement authority with respect to compliance with federal consumer financial protection laws and regulations by institutions under its supervision and is authorized to conduct investigations to determine whether any person is, or has, engaged in conduct that violates such laws or regulations.

This regulation and supervision establishes a comprehensive framework to regulate and control the activities in which we can engage and is intended primarily for the protection of the DIF, the depositors and other consumers. 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 OCC, the FDIC, the CFPB, the FRB or U.S. Congress, could have a material adverse impact on Astoria Bank and our respective operations.

The description of statutory provisions and regulations applicable to federally chartered savings associations and their holding companies and of tax matters set forth in this document does not purport to be a complete description of all such statutes and regulations and their effects on Astoria Bank and us. Other than the disclosures noted in this section and in Item 1A, “Risk Factors,” there is no additional guidance from our banking regulators which is likely to have a material impact on our results of operations, liquidity, capital or financial position.

Federally Chartered Savings Association Regulation

Business Activities

Astoria Bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, or HOLA, and the regulations of the OCC thereunder. Under these laws and regulations, Astoria Bank 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 Bank may also establish service corporations that may engage in activities

22


not otherwise permissible for Astoria Bank, 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 unless the debt securities may be sold with reasonable promptness at a price that corresponds reasonably to their fair value and such securities are investment grade, (2) a limit of 400% of an association’s capital on the aggregate amount of loans secured by non-residential real estate property, (3) a limit of 20% of an association’s assets on commercial loans, with the amount of commercial loans in excess of 10% of assets being limited to small business loans, (4) a limit of 35% of an association’s assets on the aggregate amount of consumer loans and acquisitions of certain debt securities, (5) a limit of 5% of assets on non-conforming loans (certain 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.

In October 2006, the federal bank regulatory agencies, or the Agencies, published the “Interagency Guidance on Nontraditional Mortgage Product Risks,” or the Nontraditional Mortgage Guidance. The Nontraditional Mortgage Guidance describes sound practices for managing risk, as well as marketing, originating and servicing nontraditional mortgage products, which include, among other things, interest-only loans. The Nontraditional Mortgage Guidance sets forth supervisory expectations with respect to loan terms and underwriting standards, portfolio and risk management practices and consumer protection.

In December 2006, the Agencies published guidance entitled “Interagency Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices,” or the CRE Guidance, to address concentrations of commercial real estate loans in savings associations. The CRE Guidance reinforces and enhances the OCC’s existing regulations and guidelines for real estate lending and loan portfolio management, but does not establish specific commercial real estate lending limits. However, the CRE Guidance states that an institution is potentially exposed to significant commercial real estate concentration risk, and should employ enhanced risk management practices, where (1) total commercial real estate loans represents 300% or more of its total capital and (2) the outstanding balance of such institution's commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.

In June 2007, the Agencies issued the “Statement on Subprime Mortgage Lending,” or the Subprime Lending Statement, to address the growing concerns facing the subprime mortgage market, particularly with respect to rapidly rising subprime default rates that may indicate borrowers do not have the ability to repay adjustable rate subprime loans originated by financial institutions. In particular, the Agencies expressed concern in the Subprime Lending Statement that current underwriting practices do not take into account that many subprime borrowers are not prepared for “payment shock” and that the current subprime lending practices compound risk for financial institutions. The Subprime Lending Statement describes the prudent safety and soundness and consumer protection standards that financial institutions should follow to ensure borrowers obtain loans that they can afford to repay. The Subprime Lending Statement also reinforces the April 2007 Interagency Statement on Working with Mortgage Borrowers, in which the Agencies encouraged institutions to work constructively with residential borrowers who are financially unable or reasonably expected to be unable to meet their contractual payment obligations on their home loans.

In October 2009, the Agencies adopted a policy statement supporting prudent commercial real estate mortgage loan workouts, or the 2009 CRE Policy Statement. The 2009 CRE Policy Statement provides guidance for examiners, and for financial institutions that are working with commercial real estate mortgage loan borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties. The 2009 CRE Policy Statement details risk-management practices for loan workouts that support prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency, and timely loss recognition. Financial institutions that implement prudent loan workout arrangements after performing comprehensive reviews of borrowers' financial conditions will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications. In addition, performing loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers, will not be subject to adverse classification solely because the value of the underlying collateral declined. The 2009 CRE Policy Statement reiterates existing guidance that examiners are expected to take a balanced approach in assessing institutions’ risk-management practices for loan workout activities.


23


In December 2015, the Agencies released a statement entitled “Statement on Prudent Risk Management for Commercial Real Estate Lending”, or the 2015 CRE Statement. In the 2015 CRE Statement, the Agencies express concerns about easing commercial real estate underwriting standards, direct financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and indicate that they will continue to pay special attention to commercial real estate lending activities and concentration going forward.

We have evaluated the Nontraditional Mortgage Guidance, the CRE Guidance, the Subprime Lending Statement, the 2009 CRE Policy Statement and the 2015 CRE Statement to determine our compliance and, as necessary, modified our risk management practices, underwriting guidelines and consumer protection standards. See “Lending Activities - Residential Mortgage Lending and Multi-Family and Commercial Real Estate Lending” for a discussion of our loan product offerings and related underwriting standards and “Asset Quality” in Item 7, “MD&A,” for information regarding our loan portfolio composition.

In January 2013, pursuant to the Reform Act, the Agencies issued final rules on appraisal requirements for higher-priced mortgage loans which became effective in January 2014. For mortgage loans with an annual percentage rate that exceeds a certain threshold, Astoria Bank must obtain an appraisal using a licensed or certified appraiser, subject to certain exemptions. The appraiser must prepare a written appraisal report based on a physical inspection of the interior of the property. Astoria Bank must also then disclose to applicants information about the purpose of the appraisal and provide them with a free copy of the appraisal report. Qualified Mortgages are exempt from these appraisal requirements.

In December 2013, the Agencies, the SEC and the Commodity Futures Trading Commission adopted final rules implementing Section 619 of the Reform Act. Section 619 and the final implementing rules are commonly known as the “Volcker Rule.” The Volcker Rule prohibits banking entities from acquiring and retaining an ownership interest in, sponsoring, or having certain relationships with a “covered fund.” The Volcker Rule generally treats as a covered fund any entity that would be an investment company under the Investment Company Act of 1940, or the 1940 Act, but for the application of the exemptions from SEC registration set forth in Section 3(c)(1) (fewer than 100 beneficial owners) or Section 3(c)(7) (qualified purchasers) of the 1940 Act. In addition to prohibiting a banking entity from sponsoring or having an ownership interest in a covered fund, the Volcker Rule also limits the term of relationships between banking entities and covered funds and imposes new disclosure obligations for covered funds serviced by banking entities. Under the Volcker Rule, banking entities are also prohibited from engaging in proprietary trading.

The Volcker Rule has not had a material effect on our operations as we do not engage in proprietary trading, do not have any ownership interest in any funds that are not permitted under the Volcker Rule and do not engage in any other of the activities prohibited by the Volcker Rule. As a depositary institution with over $10 billion in assets, we have adopted additional policies and systems to ensure compliance with the Volcker Rule.

Capital Requirements

At December 31, 2016, Astoria Bank exceeded each of its capital requirements with a Tier 1 leverage capital ratio of 12.09%, Common equity tier 1 risk-based capital ratio of 20.85%, Tier 1 risk-based capital ratio of 20.85% and Total risk-based capital ratio of 21.88%. At December 31, 2016, Astoria Financial Corporation also exceeded each of its capital requirements with a Tier 1 leverage capital ratio of 10.85%, Common equity tier 1 risk-based capital ratio of 17.29%, Tier 1 risk-based capital ratio of 18.78% and Total risk-based capital ratio of 19.81%.


24


Pursuant to the Reform Act, in July 2013, the Agencies, issued final rules, or the Final Capital Rules, that subjected many savings and loan holding companies, including Astoria Financial Corporation, to consolidated capital requirements effective January 1, 2015. The Final Capital Rules also revised the quantity and quality of required minimum risk-based and leverage capital requirements, consistent with the Reform Act and the Third Basel Accord adopted by the Basel Committee on Banking Supervision, or Basel III capital standards.  In doing so, the Final Capital Rules:

Established a new minimum Common equity tier 1 risk-based capital ratio (common equity tier 1 capital to total risk-weighted assets) of 4.5% and increased the minimum Tier 1 risk-based capital ratio from 4.0% to 6.0%, while maintaining the minimum Total risk-based capital ratio of 8.0% and the minimum Tier 1 leverage capital ratio of 4.0%.
Revised the rules for calculating risk-weighted assets to enhance their risk sensitivity.
Phased out trust preferred securities and cumulative perpetual preferred stock as Tier 1 capital.
Added a requirement to maintain a minimum conservation buffer, or the Conservation Buffer, composed of Common equity tier 1 capital, of 2.5% of risk-weighted assets, to be applied to the new Common equity tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the Total risk-based capital ratio, which means that banking organizations, on a fully phased in basis no later than January 1, 2019, must maintain a minimum Common equity tier 1 risk-based capital ratio of 7.0%, a minimum Tier 1 risk-based capital ratio of 8.5% and a minimum Total risk-based capital ratio of 10.5%.
Changed the definitions of capital categories for insured depository institutions for purposes of the Federal Deposit Insurance Corporation Improvement Act of 1991 prompt corrective action provisions.  Under these revised definitions, to be considered well-capitalized, an insured depository institution must have a Tier 1 leverage capital ratio of at least 5.0%, a Common equity tier 1 risk-based capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0% and a Total risk-based capital ratio of at least 10.0%.

The new minimum regulatory capital ratios and changes to the calculation of risk-weighted assets became effective for Astoria Bank and Astoria Financial Corporation on January 1, 2015. The required minimum Conservation Buffer began to be phased in incrementally, starting at 0.625% on January 1, 2016, increased to 1.25% on January 1, 2017, and will increase to 1.875% on January 1, 2018 and 2.5% on January 1, 2019.

The Final Capital Rules established common equity Tier 1 capital as a new capital component. Common equity Tier 1 capital consists of common stock instruments that meet the eligibility criteria in the Final Capital Rules, retained earnings, accumulated other comprehensive income/loss and common equity Tier 1 minority interest. As a result, Tier 1 capital has two components: common equity Tier 1 capital and additional Tier 1 capital. The Final Capital Rules also revised the eligibility criteria for inclusion in additional Tier 1 and Tier 2 capital. As a result of these changes, certain non-qualifying capital instruments, including cumulative preferred stock and trust preferred securities, are excluded as a component of Tier 1 capital for institutions of our size.

The Final Capital Rules further require that certain items be deducted from common equity Tier 1 capital, including (1) goodwill and other intangible assets, other than mortgage servicing rights, or MSR, net of deferred tax liabilities, or DTLs; (2) deferred tax assets that arise from operating losses and tax credit carryforwards, net of valuation allowances and DTLs; (3) after-tax gain-on-sale associated with a securitization exposure; and (4) defined benefit pension fund assets held by a depository institution holding company, net of DTLs. In addition, banking organizations must deduct from common equity Tier 1 capital the amount of certain assets, including mortgage servicing assets, that exceed certain thresholds. The Final Capital Rules also allow all but the largest banking organizations to make a one-time election not to recognize unrealized gains and losses on available-for-sale debt securities in regulatory capital, as under prior capital rules.

The Final Capital Rules provide that the failure to maintain the minimum Conservation Buffer will result in restrictions on capital distributions and discretionary cash bonus payments to executive officers. If a banking organization’s Conservation Buffer is less than 0.625%, the banking organization may not make any capital distributions or discretionary cash bonus payments to executive officers. If the Conservation Buffer is greater than 0.625% but not greater than 1.25%, capital distributions and discretionary cash bonus payments are limited to 20% of net income for

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the four calendar quarters preceding the applicable calendar quarter (net of any such capital distributions), or Eligible Retained Income. If the Conservation Buffer is greater than 1.25% but not greater than 1.875%, the limit is 40% of Eligible Retained Income, and if the Conservation Buffer is greater than 1.875% but not greater than 2.5%, the limit is 60% of Eligible Retained Income. The preceding thresholds for the Conservation Buffer and related restrictions represent the fully phased in rules effective no later than January 1, 2019. Such thresholds will be phased in incrementally throughout the phase in period, with the lowest thresholds having become effective January 1, 2016. As a result, under the Final Capital Rules, if Astoria Bank fails to maintain the minimum Conservation Buffer, we will be subject to limits, and possibly prohibitions, on our ability to obtain capital distributions from Astoria Bank. If we do not receive sufficient cash dividends from Astoria Bank, then we may not have sufficient funds to pay dividends on our common and preferred stock, service our debt obligations or repurchase our common stock. In addition, if Astoria Bank fails to maintain the minimum Conservation Buffer, we may be limited in our ability to pay certain cash bonuses to our executive officers which may make it more difficult to retain key personnel.

In assessing an institution’s capital adequacy, the OCC takes into consideration not only these numeric factors but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where necessary. Astoria Bank, as a matter of prudent management, targets as its goal the maintenance of capital ratios that exceed these minimum requirements and that are consistent with Astoria Bank’s risk profile.

Stress Tests

The Reform Act requires national banks and federal savings associations with total consolidated assets of more than $10 billion to conduct annual stress tests. In October 2012, the OCC published its final rules requiring annual capital-adequacy stress tests for national banks and federal savings associations with consolidated assets of more than $10 billion, or the Stress Test Rule.  The Stress Test Rule also requires each institution to establish and maintain a system of controls, oversight and documentation, including policies and procedures, designed to ensure that the stress testing processes used by the institution are effective in meeting the requirements of the rules. In December 2014, the OCC amended the Stress Test Rule to shift the dates of the annual stress testing cycle. In accordance with the Stress Test Rule, Astoria Bank conducted its annual stress test using financial data as of December 31, 2015, reported the results of the stress test to the OCC on July 27, 2016 and publicly disclosed a summary of the results of its annual stress test on October 21, 2016 that concluded we remain above regulatory-defined well-capitalized thresholds.

In May 2012, the Agencies adopted final supervisory guidance which outlines high-level principles for general stress testing practices, or the May 2012 Guidance, which is applicable to all banking organizations with more than $10 billion in total consolidated assets. The May 2012 Guidance provides an overview of how a banking organization should structure its stress testing activities and ensure they fit into overall risk management. The May 2012 Guidance outlines broad principles for a satisfactory stress testing framework and describes the manner in which stress testing should be employed as an integral component of risk management that is applicable at various levels of aggregation within a banking organization, as well as for contributing to capital and liquidity planning.

In addition, during the 2014 first quarter, the Agencies issued final guidance outlining high-level principles for implementation of the stress tests required by the Reform Act and the Stress Test Rule, or the Stress Test Guidance, which is applicable to all bank and savings and loan holding companies, national banks, state-member banks, state non-member banks, federal savings associations and state chartered savings associations with more than $10 billion but less than $50 billion in total consolidated assets. The Stress Test Guidance discusses supervisory expectations for stress test practices under the Stress Test Rule. The Stress Test Guidance states that a company is expected to ensure that projected balance sheet and risk-weighted assets remain consistent with regulatory and accounting changes, are applied consistently across the company, and are consistent with the economic scenarios provided by the OCC for use in the stress test and the company’s past history of managing through different business environments. Furthermore, the Stress Test Guidance states that a company must consider the results of stress testing in the company’s capital planning, assessment of capital adequacy and risk management practices.


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Interest Rate Risk

The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, required that the Agencies revise their risk-based capital standards to take into account IRR concentration of risk and the risks of non-traditional activities. The OCC regulations do not include a specific IRR component of the risk based capital requirement. However, the OCC expects all federal savings associations to have an independent IRR measurement process in place that measures both earnings and capital at risk, as described in the Advisory on Interest Rate Risk Management, or the 2010 IRR Advisory, and a Joint Agency Policy Statement on IRR, or the 1996 IRR policy statement, each described below.

The 1996 IRR policy statement emphasizes the need for active board of director and senior management oversight and a comprehensive risk management process that effectively identifies, measures and controls IRR.

The 2010 IRR Advisory reminds institutions of the supervisory expectations regarding sound practices for managing IRR. While some degree of IRR is inherent in the business of banking, the Agencies expect institutions to have sound risk management practices in place to measure, monitor and control IRR exposures, and IRR management should be an integral component of an institution’s risk management infrastructure. The Agencies expect all institutions to manage their IRR exposures using processes and systems commensurate with their earnings and capital levels, complexity, business model, risk profile and scope of operations, and the 2010 IRR Advisory reiterates the importance of effective corporate governance, policies and procedures, risk measuring and monitoring systems, stress testing, and internal controls related to the IRR exposures of institutions.

The 2010 IRR Advisory encourages institutions to use a variety of techniques to measure IRR exposure which includes simple maturity gap analysis, income measurement and valuation measurement for assessing the impact of changes in market rates as well as simulation modeling to measure IRR exposure. Institutions are encouraged to use the full complement of analytical capabilities of their IRR simulation models. The 2010 IRR Advisory also reminds institutions that stress testing, which includes both scenario and sensitivity analysis, is an integral component of IRR management. The 2010 IRR Advisory indicates that institutions should regularly assess IRR exposures beyond typical industry conventions, including changes in rates of greater magnitude (for example, up and down 300 and 400 basis points as compared to up and down 200 basis points which is the general practice) across different tenors to reflect changing slopes and twists of the yield curve.

The 2010 IRR Advisory emphasizes that effective IRR management not only involves the identification and measurement of IRR, but also provides for appropriate actions to control this risk. The adequacy and effectiveness of an institution’s IRR management process and the level of its IRR exposure are critical factors in the Agencies’ evaluation of an institution’s sensitivity to changes in interest rates and capital adequacy.

Prompt Corrective Regulatory Action

FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the banking regulators are required to take certain, and authorized to take other, supervisory actions against undercapitalized institutions, based upon five categories of capitalization which FDICIA created: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized,” the severity of which depends upon the institution’s degree of capitalization. Generally, a capital restoration plan must be filed with the OCC within 45 days of the date an association receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” and the plan must be guaranteed by any parent holding company. In addition, various mandatory supervisory actions become immediately applicable to the institution, including restrictions on growth of assets and other forms of expansion.

Prior to January 1, 2015, under OCC regulations, an insured depository institution was considered well capitalized if its Total risk-based capital ratio was 10.0% or greater, its Tier 1 risk-based capital ratio was 6.0% or greater and its Tier 1 leverage capital ratio was 5.0% or greater, and it was not subject to any order or directive by the OCC to meet a specific capital level. Under the Final Capital Rules, described above, effective January 1, 2015, to be considered well capitalized, an insured depository institution must maintain a Total risk-based capital ratio of 10.0% or greater,

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a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 risk-based capital ratio of 6.5% or greater and a Tier 1 leverage capital ratio of 5.0% or greater and not be subject to any order or directive by the OCC to meet a specific capital level. As of December 31, 2016, Astoria Bank’s capital ratios were above the minimum levels required to be considered well capitalized by the OCC, with a Tier 1 leverage capital ratio of 12.09%, Common Equity Tier 1 risk-based capital ratio of 20.85%, Tier 1 risk-based capital ratio of 20.85% and Total risk-based capital ratio of 21.88%.

In addition to measures taken under the prompt corrective action provisions with respect to undercapitalized institutions, insured banks and their holding companies may be subject to potential enforcement actions by their regulators for unsafe and unsound practices in conducting their business or for violations of law or regulation, including the filing of a false or misleading regulatory report. Enforcement actions under this authority may include the issuance of cease and desist orders, the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal agreements, or removal and prohibition orders against “institution-affiliated parties” (generally bank insiders). Further, the FRB may bring an enforcement action against a depository institution holding company either to address undercapitalization in the holding company or to require the holding company to take measures to remediate undercapitalization or other safety and soundness concerns in a depository institution subsidiary.

CFPB Regulation of Mortgage Origination and Servicing

Ability to Repay Rules. The CFPB adopted final rules, referred to as the “Ability to Repay Rules,” that (1) prohibit creditors, such as Astoria Bank, from extending mortgage loans without regard for the consumer’s ability to repay, (2) specify the types of income and assets that may be considered in the ability-to-repay determination, the permissible sources for verification, and the required methods of calculating a loan’s monthly payments and (3) establish certain protections from liability for loans that meet the requirements of a Qualified Mortgage. Previously, the Truth in Lending Act, or Regulation Z, prohibited creditors from extending higher-priced mortgage loans without regard for the consumer’s ability to repay. The Ability to Repay Rules extend application of this requirement to all loans secured by dwellings, not just higher-priced mortgages.

As defined by the CFPB, a Qualified Mortgage is a mortgage that meets the following standards prohibiting or limiting certain high risk products and features: (1) No excessive upfront points and fees - generally points and fees paid by the borrower must not exceed 3% of the total amount borrowed; (2) No toxic loan features - prohibited features include interest-only loans, negative-amortization loans, terms beyond 30 years and balloon loans; and (3) Limit on debt-to-income ratios - borrowers’ total debt-to-income ratios must be no higher than 43%, with certain limited exceptions for loans eligible for purchase, guarantee or insurance by the GSEs or a federal agency.

In October 2014, the CFPB published a final rule that allows lenders to cure loans that do not meet the “points and fees” test under the Qualified Mortgage definition, but that otherwise satisfy the requirements of a Qualified Mortgage. Pursuant to the final rule, lenders will be able to “cure” loans for which the points and fees exceed the 3% cap for Qualified Mortgages by refunding the points and fees that exceed the 3% cap, with interest within 210 days after closing of the loan. The cure mechanism is available for loans closed on or after November 3, 2014 and before January 10, 2021.

Lenders that generate Qualified Mortgage loans will receive specific protections against borrower lawsuits that could result from failing to satisfy the Ability to Repay Rules. There are two levels of liability protections for Qualified Mortgages: the Safe Harbor protection and the Rebuttable Presumption protection. Safe Harbor Qualified Mortgages are lower-priced loans with interest rates closer to the prime rate, issued to borrowers with high credit scores. Borrowers suing lenders under Safe Harbor Qualified Mortgages are faced with overcoming the pre-determined legal conclusion that the lender has satisfied the Ability to Repay Rules. Rebuttable Presumption Qualified Mortgages are loans at higher prices that are granted to borrowers with lower credit scores. Lenders generating Rebuttable Presumption Qualified Mortgages receive the protection of a presumption that they have legally satisfied the Ability to Repay Rules while the borrower can rebut that presumption by proving that the lender did not consider the borrower’s living expenses after their mortgage and other debts. In addition, Qualified Mortgages are exempt from the new appraisal requirement rules described under “Federally Chartered Savings Association Regulation - Business Activities.”


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As a result of the adoption of the Ability to Repay Rules, we have changed our underwriting practices and, as of January 10, 2014, only originate mortgage loans that meet the requirements of a Qualified Mortgage.

Mortgage Servicing Rules. The CFPB also issued final rules concerning mortgage servicing standards, or the Mortgage Servicing Rules, which amend both the Real Estate Settlement Procedures Act, or Regulation X, and Regulation Z. The Regulation X rule requires servicers to provide certain information to borrowers, to provide protections to such borrowers in connection with force-placed insurance, to establish policies and procedures to achieve certain delineated objectives, to correct errors asserted by borrowers and to evaluate borrowers’ applications for available loss mitigation options. The Regulation Z rule requires creditors, assignees and servicers to provide interest rate adjustment notices for ARM loans, periodic statements for residential mortgage loans, prompt crediting of mortgage payments and responses to requests for payoff amounts.

In August 2016, the CFPB issued a final rule amending the Mortgage Servicing Rules, which further amends both Regulation X and Regulation Z. The final rule, among other things, requires servicers to provide certain borrowers with foreclosure protections more than once over the life of the loan, expands consumer protections to surviving family members and other homeowners, requires servicers to notify borrowers when loss mitigation applications are complete, protects struggling borrowers during servicing transfers, clarifies when a borrower becomes delinquent and provides more information to borrowers in bankruptcy.

Loan Originator Qualification and Compensation Rule. The CFPB also issued a final rule implementing requirements and restrictions imposed by the Reform Act concerning, among other things, qualifications of individual loan originators and the compensation practices with respect to such persons. The rule prohibits loan origination organizations from basing compensation for themselves or individual loan originators on any of the origination transaction’s terms or conditions and prohibits such persons from receiving compensation from another person in connection with the same transaction. The rule also imposes duties on loan originator organizations to ensure that their individual loan originators meet certain licensing or qualification standards and extends existing recordkeeping requirements.

Enforcement. The CFPB has exclusive examination and primary enforcement authority with respect to compliance with federal consumer financial protection laws and regulations by institutions under its supervision and is authorized, individually or jointly with the Agencies, to conduct investigations to determine whether any person is, or has, engaged in conduct that violates such laws or regulations. The CFPB may bring an administrative enforcement proceeding or civil action in federal district court. In addition, in accordance with a memorandum of understanding entered into between the CFPB and the Department of Justice, or DOJ, the two agencies have agreed to coordinate efforts related to enforcing the fair lending laws, which includes information sharing and conducting joint investigations, and have done so on a number of occasions. As an independent bureau within the FRB, the CFPB may impose requirements more severe than the previous bank regulatory agencies.

Arbitration Rule. In May 2016, the CFPB issued a proposed rule that would prohibit banking organizations from using a pre-dispute arbitration agreement to block consumer class actions in court and would require banking organizations to insert language into their arbitration agreements reflecting this limitation. The proposed rule would also require banking organizations that use pre-dispute arbitration agreements to submit certain records relating to arbitral proceedings to the CFPB. The proposed rule would generally apply to contracts entered into more than 180 days after the effective date of any final rule.

Insurance of Deposit Accounts

Astoria Bank is a member of the DIF and pays its deposit insurance assessments to the DIF. In accordance with rules adopted by the FDIC in 2011 pursuant to the Reform Act, which became effective in April 2011, the assessment base for deposit insurance assessments was changed from an institution’s deposit base to its average consolidated total assets minus average tangible equity. In adopting such rules, the FDIC also established a new assessment rate schedule, as well as alternative rate schedules that become effective when the DIF reserve ratio reaches certain levels.


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In determining the deposit insurance assessments to be paid by insured depository institutions, the FDIC generally assigns an institution to one of four risk categories based on the institution’s most recent supervisory ratings and capital ratios. For example, for institutions within Risk Category I, assessment rates generally depend upon a combination of CAMELS (capital adequacy, asset quality, management, earnings, liquidity, sensitivity to market risk) component ratings and financial ratios. In addition, an institution’s base assessment rate is generally subject to following adjustments: (1) a decrease for the institution’s long-term unsecured debt, including most senior and subordinated debt, (2) an increase for brokered deposits above a threshold amount and (3) an increase for unsecured debt held that is issued by another insured depository institution.

However, for large insured depository institutions, generally defined as those with at least $10 billion in total assets, such as Astoria Bank, the FDIC has eliminated risk categories when calculating the initial base assessment rates and now combine CAMELS ratings and financial measures into two scorecards to calculate assessment rates, one for most large insured depository institutions and another for highly complex insured depository institutions (which are generally those with more than $50 billion in total assets that are controlled by a parent company with more than $500 billion in total assets). Each scorecard has two components - a performance score and loss severity score, which are combined and converted to an initial assessment rate. The FDIC has the ability to adjust a large or highly complex insured depository institution’s total score by a maximum of 15 points, up or down, based upon significant risk factors that are not captured by the scorecard. Under the current assessment rate schedule, the initial base assessment rate for large and highly complex insured depository institutions ranges from three to 30 basis points, and the total base assessment rate, after applying the unsecured debt and brokered deposit adjustments, ranges from one and one-half to 40 basis points.

The FDIC annually establishes for the DIF a designated reserve ratio, or DRR, of estimated insured deposits. The FDIC has announced that the DRR for 2017 will remain at 2.00%, which is the same ratio that has been in effect since January 1, 2011. The FDIC is authorized to change deposit insurance assessment rates as necessary to maintain the DRR, without further notice-and-comment rulemaking, provided that: (1) no such adjustment can be greater than three basis points from one quarter to the next, (2) adjustments cannot result in rates more than three basis points above or below the base rates and (3) rates cannot be negative.

As a result of the failures of a number of banks and thrifts during the financial crisis, there was a significant increase in the loss provisions of the DIF. This resulted in a decline in the actual DIF reserve ratio during 2008 below the then minimum DRR of 1.15%. As a result, the FDIC was required to establish a restoration plan to restore the reserve ratio to 1.15% within a period of eight years.

The Reform Act subsequently increased the minimum DRR for the DIF from 1.15% to 1.35% of insured deposits, which must be reached by September 30, 2020, and provides that in setting the assessment rates necessary to meet the new requirement, the FDIC shall offset the effect of this provision on insured depository institutions with total consolidated assets of less than $10 billion, so that more of the cost of raising the reserve ratio will be borne by the institutions with more than $10 billion in assets, such as Astoria Bank. In October 2010, the FDIC adopted a restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Reform Act.

On October 22, 2015, the FDIC issued a proposal to increase the reserve ratio for the DIF to the minimum level of 1.35% as required by the Reform Act. The final rule was adopted on March 15, 2016 and imposed on Astoria Bank, as an insured depository institution with $10 billion or more in total consolidated assets, a quarterly surcharge equal to an annual rate of 4.5 basis points applied to Astoria Bank’s deposit insurance assessment base, after making certain adjustments. These surcharges commenced in the fourth quarter of 2016 and are expected to continue for approximately eight quarters; however, if the reserve ratio for the DIF does not reach the required level by December 31, 2018, the FDIC would impose a shortfall assessment on March 31, 2019, which would be collected on June 30, 2019.

Our expense for FDIC deposit insurance assessments totaled $11.4 million in 2016 and $15.6 million in 2015. The FDIC deposit insurance assessments are in addition to the assessments for payments on the bonds issued in the late 1980s by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation.

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The Financing Corporation payments will continue until the bonds mature in 2017 through 2019. Our expense for these payments totaled $753,000 in 2016 and $822,000 in 2015.

Loans to One Borrower

Under the HOLA, savings associations are generally subject to the national bank limits on loans to one borrower. Generally, savings associations may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the institution's unimpaired capital and surplus. Additional amounts may be loaned, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are secured by readily-marketable collateral. Astoria Bank is in compliance with the applicable loans to one borrower limitations. At December 31, 2016, Astoria Bank’s largest aggregate amount of loans to one borrower totaled $65.9 million. All of the loans for the largest borrower were performing in accordance with their terms and the borrower had no affiliation with Astoria Bank.

Qualified Thrift Lender Test

The HOLA requires savings associations to meet a Qualified Thrift Lender, or QTL, test. Under the QTL test, a savings association is required to maintain at least 65% of its “portfolio assets” (total assets less (1) specified liquid assets up to 20% of total assets, (2) intangibles, including goodwill, and (3) the value of property used to conduct business) in certain “qualified thrift investments” (primarily mortgage loans secured by one-to-four family and multi-family residential properties and related investments, including certain mortgage-backed securities, credit card loans, student loans, and small business loans) on a monthly basis during at least 9 out of every 12 months. As of December 31, 2016, Astoria Bank maintained in excess of 87% of its portfolio assets in qualified thrift investments and had more than 65% of its portfolio assets in qualified thrift investments for each of the 12 months in the year ended December 31, 2016. Therefore, Astoria Bank qualified under the QTL test.

A savings association that fails the QTL test will immediately be prohibited from: (1) making any new investment or engaging in any new activity not permissible for a national bank, (2) paying dividends, unless such payment would be permissible for a national bank, is necessary to meet the obligations of a company that controls the savings association, and is specifically approved by the OCC and the FRB, and (3) establishing any new branch office in a location not permissible for a national bank in the association's home state. A savings association that fails to meet the QTL test is deemed to have violated the HOLA and may be subject to OCC enforcement action. In addition, if the association does not requalify under the QTL test within three years after failing the test, the association would be prohibited from retaining any investment or engaging in any activity not permissible for a national bank.

Limitation on Capital Distributions

The OCC 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 OCC regulates all capital distributions by Astoria Bank directly or indirectly to us, including dividend payments. A subsidiary of a savings and loan holding company, such as Astoria Bank, must file a notice or seek affirmative approval from the OCC at least 30 days prior to each proposed capital distribution. Whether an application is required is based on a number of factors including whether the institution qualifies for expedited treatment under the OCC rules and regulations or 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. During 2016, Astoria Bank was required to file such applications, but did not make a request to the OCC for capital distributions.  Effective 2017, Astoria Bank is not required to file such applications, but is required to notify the OCC of its intent to pay future dividends. In addition, as a subsidiary of a savings and loan holding company, Astoria Bank must provide notice to the FRB at least 30 days prior to declaring a dividend. During 2016, Astoria Bank paid dividends to Astoria Financial Corporation totaling $18.7 million pursuant to an approved application for the payment of a dividend filed with the OCC in September 2015.
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Astoria Bank 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 if the dividend would violate a prohibition contained in any statute, regulation or agreement. Under the Federal Deposit Insurance Act, or FDIA, an insured depository institution such as Astoria Bank 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 Bank also may be restricted at any time at the discretion of the OCC if it deems the payment to constitute an unsafe and unsound banking practice.

Liquidity

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

Assessments

The OCC charges assessments to recover the costs of examining savings associations and their affiliates. Our expense for these assessments totaled $3.3 million in 2016 and $2.8 million in 2015.

Branching

Federally chartered savings associations may branch nationwide to the extent allowed by federal statute. All of Astoria Bank’s branches are located in New York.

Community Reinvestment

Under the CRA, as implemented by OCC regulations, a federally chartered savings association has a continuing and affirmative obligation, consistent with its safe and sound operation, to ascertain and meet the credit needs of its entire community, including low and moderate income areas. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the OCC, in connection with its examination of a federally chartered savings association, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The assessment focuses on three tests: (1) a lending test, to evaluate the institution’s record of making loans, including community development loans, in its designated assessment areas; (2) an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and areas and small businesses; and (3) a service test, to evaluate the institution’s delivery of banking services throughout its CRA assessment area, including low and moderate income areas. The CRA also requires all institutions to make public disclosure of their CRA ratings. Astoria Bank was rated as “satisfactory” in its last CRA examination. Regulations require that we publicly disclose certain agreements that are in fulfillment of CRA. We have no such agreements in place at this time.

Transactions with Related Parties

Astoria Bank is subject to the affiliate and insider transaction rules set forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, or FRA, and Regulation W and Regulation O issued by the FRB. 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 Bank would include us and our non-federally chartered savings association subsidiaries, if any), principal stockholders, directors and executive officers. The Reform Act expanded the affiliate transaction rules in Sections 23A and 23B of the FRA to broaden the definition of affiliate and to apply this definition to securities lending, repurchase agreement and derivatives activities that Astoria Bank may have with an affiliate. In addition, the FRB regulations include additional restrictions on savings associations under Section 11 of HOLA, including provisions prohibiting a savings association from making a loan to an affiliate that is engaged in non-bank holding company activities and provisions prohibiting a savings association from purchasing or investing

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in securities issued by an affiliate that is not a subsidiary. The FRB regulations also include certain specific exemptions from these prohibitions. The FRB and the OCC require each depository institution that is subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W.

Section 402 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, prohibits the extension of personal loans to directors and executive officers of issuers (as defined in Sarbanes-Oxley). The prohibition, however, does not apply to loans advanced by an insured depository institution, such as Astoria Bank, that is subject to the insider lending restrictions of Section 22(h) of the FRA.

Standards for Safety and Soundness

Pursuant to the requirements of FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, the Agencies adopted guidelines establishing general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, IRR exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the OCC adopted regulations pursuant to FDICIA to require a savings association that is given notice by the OCC that it is not satisfying any of such safety and soundness standards to submit a compliance plan to the OCC. 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 OCC must issue an order directing corrective actions and may issue an order directing other actions of the types to which a significantly undercapitalized institution is subject under the “prompt corrective action” provisions of FDICIA. If a savings association fails to comply with such an order, the OCC may seek to enforce such order in judicial proceedings and to impose civil money penalties. For further discussion, see “Regulation and Supervision - Federally Chartered Savings Association Regulation - Prompt Corrective Regulatory Action.”

In July 2010, the Agencies issued Guidance on Sound Incentive Compensation Policies that applies to all banking organizations supervised by the Agencies. Pursuant to the guidance, to be consistent with safety and soundness principles, a banking organization’s incentive compensation arrangements should: (1) provide employees with incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be supported by strong corporate governance including active and effective oversight by the banking organization’s board of directors.

Section 956 of the Reform Act requires the Agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities that encourage inappropriate risk-taking by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. The Agencies issued such proposed rules in April 2011 and issued a revised proposed rule in June 2016. The revised proposed rule would apply to all banks, among other institutions, with at least $1 billion in average total consolidated assets, for which it would go beyond the existing Guidance on Sound Incentive Compensation Policies to (i) prohibit certain types and features of incentive-based compensation arrangements for senior executive officers, (ii) require incentive-based compensation arrangements to adhere to certain basic principles to avoid a presumption of encouraging inappropriate risk, (iii) require appropriate board or committee oversight and (iv) establish minimum recordkeeping and (v) mandate disclosures to the appropriate federal banking agency.

Insurance Activities

Astoria Bank is generally permitted to engage in certain insurance activities through its subsidiaries. However, Astoria Bank is subject to regulations prohibiting depository institutions from conditioning the extension of credit to individuals upon either the purchase of an insurance product or annuity or an agreement by the consumer not to purchase an

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insurance product or annuity from an entity that is not affiliated with the depository institution. The regulations also require prior disclosure of this prohibition to potential insurance product or annuity customers.

Privacy Protection and Cybersecurity

Astoria Bank is subject to OCC regulations implementing the privacy protection provisions of the Gramm-Leach Bliley Act, or Gramm-Leach. These regulations require Astoria Bank 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 Bank 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 covered by an exception, Astoria Bank is required to provide its customers with the ability to “opt-out” of having Astoria Bank share their nonpublic personal information with unaffiliated third parties.

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

The Agencies, including the OCC, have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of the board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. In October 2016, the Agencies issued an advance notice of proposed rulemaking on enhanced cybersecurity risk-management and resilience standards that would apply to large and interconnected banking organizations and to services provided by third parties to these firms. These enhanced standards would apply only to depository institutions and depository institution holding companies with total consolidated assets of $50 billion or more.

Anti-Money Laundering and Customer Identification

Astoria Bank is subject to regulations implementing the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act. The USA PATRIOT Act gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements.  By way of amendments to the Bank Secrecy Act, or the BSA, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies.  Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

Among other requirements, Title III of the USA PATRIOT Act and the related regulations impose the following requirements with respect to financial institutions:

Establishment of anti-money laundering programs.
Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time.
Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering.
Prohibition on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks.

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In addition, bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act applications. In May 2016, the regulations implementing the BSA were amended to explicitly include risk-based procedures for conducting ongoing customer due diligence, to include understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile. In addition, banks must identify and verify the identity of the beneficial owners of all legal entity customers (other than those that are excluded) at the time a new account is opened (other than accounts that are exempted). We must comply with these amendments and new requirements by May 11, 2018.

Federal Home Loan Bank System

Astoria Bank is a member of the FHLB System which consists of twelve regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. Astoria Bank, as a member of the FHLB-NY, is currently required to acquire and hold shares of the FHLB-NY Class B stock. The Class B stock has a par value of $100 per share and is redeemable upon five years notice, subject to certain conditions. The Class B stock has two subclasses, one for membership stock purchase requirements and the other for activity-based stock purchase requirements. The minimum stock investment requirement in the FHLB-NY Class B stock is the sum of the membership stock purchase requirement, determined on an annual basis at the end of each calendar year, and the activity-based stock purchase requirement, determined on a daily basis. For Astoria Bank, the membership stock purchase requirement is 0.15% of the Mortgage-Related Assets, as defined by the FHLB-NY, which consists principally of residential mortgage loans and mortgage-backed securities including CMOs and REMICs, held by Astoria Bank. The activity-based stock purchase requirement for Astoria Bank is equal to the sum of: (1) 4.5% of outstanding borrowings from the FHLB-NY; (2) 4.5% of the outstanding principal balance of Acquired Member Assets, as defined by the FHLB-NY, and delivery commitments for Acquired Member Assets; (3) a specified dollar amount related to certain off-balance sheet items, which for Astoria Bank is zero; and (4) a specified percentage ranging from 0% to 5% of the carrying value on the FHLB-NY’s balance sheet of derivative contracts between the FHLB-NY and Astoria Bank, which for Astoria Bank is also zero. The FHLB-NY can adjust the specified percentages and dollar amount from time to time within the ranges established by the FHLB-NY capital plan.

Astoria Bank was in compliance with the FHLB-NY minimum stock investment requirements with an investment in FHLB-NY stock at December 31, 2016 of $124.8 million. Dividends from the FHLB-NY to Astoria Bank amounted to $6.1 million for the year ended December 31, 2016.

Federal Reserve System

FRB regulations require federally chartered savings associations to maintain cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). A reserve of 3% is to be maintained against aggregate transaction accounts between $15.5 million and $115.1 million (subject to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the FRB between 8% and 14%) against that portion of total transaction accounts in excess of $115.1 million. The first $15.5 million of otherwise reservable balances (subject to adjustment by the FRB) is exempt from the reserve requirements. Astoria Bank is in compliance with the foregoing requirements.

Required reserves must be maintained in the form of either vault cash, an account at a Federal Reserve Bank or a pass-through account as defined by the FRB. Pursuant to the Emergency Economic Stabilization Act of 2008, the Federal Reserve Banks pay interest on depository institutions’ required and excess reserve balances. The interest rate paid on required reserve balances is currently the average target federal funds rate over the reserve maintenance period. The rate on excess balances will be set equal to the lowest target federal funds rate in effect during the reserve maintenance period.

Savings and Loan 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 FRB and are subject to FRB regulation, examination, supervision and reporting requirements. In addition, the

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FRB has enforcement authority over us and our subsidiaries other than Astoria Bank. Among other things, this authority permits the FRB 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 holding companies. Unitary savings and loan holding companies that are “grandfathered,” i.e., unitary savings and loan holding companies in existence or with savings and loan holding company applications filed on or before May 4, 1999, such as us, retain their authority under the prior law. All other unitary savings and loan holding companies are limited to financially related activities permissible for financial holding companies, as defined under Gramm-Leach. Gramm-Leach also prohibits non-financial companies from acquiring grandfathered unitary savings and loan holding companies.

Except under limited circumstances, a savings and loan holding company is prohibited (directly or indirectly, or through one or more subsidiaries) from (1) acquiring control of another savings association or holding company thereof, or acquiring all or substantially all of the assets thereof, without prior written approval of the FRB; (2) acquiring or retaining, with certain exceptions, more than 5% of the voting shares 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 (3) acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by holding companies to acquire savings associations, the FRB must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the DIF, the convenience and needs of the community and competitive factors.

We are subject to the supervisory guidance issued by the FRB regarding the payment of dividends, which states that we should either eliminate, defer or significantly reduce dividends if (1) our net income available to common shareholders over the past year is insufficient to fully fund a dividend, (2) our prospective rate of earnings retention is not consistent with our capital needs and our overall current or prospective financial condition or (3) we will not meet, or are in danger of not meeting, our minimum regulatory capital adequacy ratios.

In accordance with the Reform Act, the Agencies have established consolidated risk-based and leverage capital requirements for insured depository institutions, depository institution holding companies and systemically important nonbank financial companies. As a result, as discussed above, effective January 1, 2015, we became subject to consolidated capital requirements which we have not been subject to previously. In addition, pursuant to the Reform Act, we are required to serve as a source of strength for Astoria Bank.

In October 2012, the FRB published two final rules with stress testing requirements for certain bank holding companies, state member banks, and savings and loan holding companies. In October 2014 and December 2015, the FRB published final rules that modified the start date of the stress test cycles such that we will be subject to the stress test requirements for the stress test cycle beginning January 1, 2017. Accordingly, going forward, we must conduct our annual stress test using financial data as of December 31, report the results of the stress test to the FRB on or before July 31 and publicly disclose a summary of the results of the stress test between October 15 and October 31.

Future Legislation and Regulation

At this time, it is difficult to predict the legislative and regulatory changes that will result from the combination of a new President of the United States and the first year since 2010 in which both Houses of Congress have majority representation from the same political party as the President. In recent years, however, both the new President and senior members of the House of Representatives have advocated for significant reduction of financial services regulation, including amendments to the Reform Act and structural changes to Agencies and the CFPB. In addition, on January 20, 2017, President Trump’s Chief of Staff issued a memorandum to the heads of executive departments and agencies directing them, with certain exceptions, to effectively freeze the administrative rule-making process until a department or agency head appointed or designated by President Trump reviews and approves the regulation. On February 3, 2017, President Trump signed an executive order establishing the administration’s policy to regulate the U.S. financial system according to a set of principles. The executive order also requires the Treasury Secretary to report to the President, within 120 days of the date of the executive order, on the extent to which any existing laws,

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treaties, regulations, guidance, reporting, and recordkeeping requirements promote or inhibit the principles described in the executive order. It is difficult to predict the impact that any legislative or regulatory changes will have on us, our competitors and on the financial services industry as a whole, as well as when, if ever, regulations frozen by the Trump Administration will take effect or in what form they ultimately will become effective. See “Risk Factors-The financial services industry, as well as the broader economy, may be subject to new legislation, regulation, and government policy.”

Federal Securities Laws

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

Delaware Corporation Law

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

Federal Taxation

General

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

Corporate Alternative Minimum Tax

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

Tax Bad Debt Reserves

Effective for tax years commencing January 1, 1996, federal tax legislation modified the methods by which a thrift computes its bad debt deduction. As a result, Astoria Bank is required to claim a deduction equal to its actual loan loss experience, and the “reserve method” is no longer available. Any cumulative reserve additions (i.e., bad debt deductions) in excess of actual loss experience for tax years 1988 through 1995 have been fully recaptured over a six year period. Generally, reserve balances as of December 31, 1987 will only be subject to recapture upon distribution of such reserves to shareholders. For further discussion of bad debt reserves, see “Distributions.”

Distributions

To the extent that Astoria Bank makes “nondividend distributions” to shareholders, such distributions will be considered to result in distributions from Astoria Bank’s “base year reserve” (i.e., its tax bad debt reserve as of December 31, 1987), to the extent thereof, and then from its supplemental tax-basis reserve for losses on loans, and an amount based on the amount distributed will be included in Astoria Bank’s taxable income. Nondividend distributions include distributions in excess of Astoria Bank’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 Bank’s current or accumulated earnings and profits will not constitute nondividend distributions and, therefore, will not be included in Astoria Bank’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

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

State and Local Taxation

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

NYS Taxation

For tax years ending on or before December 31, 2014, NYS imposed an annual franchise tax on banking corporations, based on net income allocable to NYS, at a rate of 7.1%. If, however, the application of an AMT (based on taxable assets allocated to New York, “alternative” net income, capital, or a flat minimum fee) resulted in a greater tax, such AMT was imposed. We were subject to the AMT for NYS for the year ended December 31, 2014. In addition, NYS imposed a tax surcharge of 17.0% of the NYS Franchise Tax, calculated using an annual franchise tax rate of 9.0% (which represented the 2000 annual franchise tax rate), allocable to business activities carried on in the Metropolitan Commuter Transportation District. The rules regarding the determination of net income allocated to NYS and AMTs differed for our subsidiaries.

Our subsidiary Fidata qualified for alternative tax treatment under Article 9A of the NYS tax law, through 2014, as a Connecticut passive investment company. Fidata maintains an office in Norwalk, Connecticut and invests in loans secured by real property. Such loans constitute intangible investments permitted to be held by a Connecticut passive investment company.

NYS income tax legislation was enacted on March 31, 2014 in connection with the approval of the NYS 2014-2015 budget. Portions of the new legislation, or the 2014 NYS Tax Legislation, resulted in significant changes in the calculation of income taxes imposed on banks and thrifts operating in NYS, including changes to (1) future period NYS tax rates, (2) rules related to sourcing of revenue for NYS tax purposes and (3) the NYS taxation of entities within one corporate structure, among other provisions. The new legislation, among other things, removed the alternative method of taxation based on assets to which we were subject for tax years ending on and prior to December 31, 2014. The new legislation also removed the alternative tax treatment applicable to Fidata. Enactment of the 2014 NYS Tax Legislation in the first quarter of 2014 caused us to recognize temporary differences and net operating loss carryforward benefits which we had been unable to recognize for NYS tax purposes previously, resulting in an increase in our net deferred tax assets in our statement of financial condition.

Effective January 1, 2015, NYS imposes an annual franchise tax on corporations, based on net income allocable to NYS, at a rate of 7.1%. If, however, the application of an AMT (based on capital) resulted in a greater tax such AMT would be imposed. For the tax year ending December 31, 2015, we were subject to the NYS tax based on net income allocable to NYS at a rate of 7.1%. NYS also imposes a tax surcharge of 25.6% of the NYS Franchise Tax, allocable to business activities carried on in the Metropolitan Commuter Transportation District. This tax applies to us, Astoria Bank and certain of Astoria Bank’s subsidiaries.

New York City Taxation

For tax years ending on or before December 31, 2014, Astoria was also subject to the New York City Financial Corporation Tax, calculated, subject to a New York City income and expense allocation, on a basis similar to that of the NYS Franchise Tax. A significant portion of Astoria Bank’s entire net income was derived from outside of the

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New York City jurisdiction, which had the effect of reducing the New York City taxable income of Astoria Bank. As was the case with NYS, for New York City we were subject to income taxes on an alternative method based on assets (which was similar to the NYS AMT) through December 31, 2014.

On April 13, 2015, a package of additional legislation, or the 2015 NYS Tax Legislation, was signed into law in NYS that, among other things, largely conformed New York City banking income tax laws to the 2014 NYS Tax Legislation. The 2015 NYS Tax Legislation was made effective retroactively to tax years beginning on or after January 1, 2015. The enactment of the new legislation caused us to be able to recognize certain temporary differences and net operating loss carryforward benefits which we had been unable to recognize for New York City purposes previously. As a result the valuation allowance against the deferred tax asset for New York City purposes was reversed in the second quarter of 2015.

Effective January 1, 2015, New York City imposed an annual franchise tax on corporations, based on net income allocable to New York City, at a rate of 8.85%. This tax applies to us, Astoria Bank, and certain of Astoria Bank’s subsidiaries.

ITEM 1A.
RISK FACTORS

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

Astoria Financial Corporation was subject to business uncertainties and contractual restrictions while the Merger was pending.

During the pendency of the Merger, we were unable to significantly advance our existing strategic initiatives to the extent previously anticipated due in part to the focus of management on the proposed Merger. In addition, the Merger Agreement restricted Astoria from making certain acquisitions and taking other specified actions without the consent of NYCB, further restricting our opportunities. Employee retention was challenging during the pendency of the Merger, as employees experienced uncertainty about their future roles. Although we retained the majority of our key personnel, we experienced an 11% decline in workforce during 2016. Uncertainty about the effect of the Merger also impaired our ability to attract replacement personnel during this period. We believe this uncertainty inhibited our ability to compete for new customers and additional business from existing customers, the impacts of which could carry forward into 2017.

We may not be able to fully execute on our strategic initiatives which could have a material adverse effect on our financial condition or results of operations. The termination of the Merger Agreement has resulted in the reevaluation of our strategic plan.

We have historically been a community-oriented retail bank offering traditional deposit products and focusing on residential mortgage lending. However, the economic environment over the past several years has made it difficult for us to profitably grow our business in the same manner as it has in the past. Accordingly, we continue to implement strategies to grow other loan categories to diversify earning assets and to increase low cost core deposits. These strategies include continued reliance on our multi-family and commercial real estate mortgage lending operations and expanding our business banking operations. Our business banking initiative includes focusing on small and middle market businesses, with an emphasis on attracting clients from larger competitors. There are costs, risks and uncertainties associated with the development, implementation and execution of these initiatives, including the investment of time and resources, the possibility that these initiatives will be unprofitable and the risk of additional liabilities associated with these initiatives.

In view of the termination of the Merger, we are reviewing our strategic plan, taking into account anticipated potential changes in interest rates, business activity, financial services legislation and regulation and overall regulatory climate. This review may result in changes to our strategic objectives, product offerings, balance sheet size and composition, staffing and operations. Our ability to successfully implement our strategic plan and to execute on new initiatives will

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depend in part on our ability to attract and retain talented individuals to help manage any new initiatives and the existence of satisfactory market conditions that will allow us to profitably grow our businesses. Our potential inability to successfully execute new initiatives could have a material adverse effect on our business, financial condition or results of operations.

Changes in interest rates may reduce our net income.

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

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

At December 31, 2016, $1.95 billion of our borrowings contain features that would allow them to be called within one year and on a quarterly basis thereafter, of which $1.00 billion of our borrowings contain features that would allow them to be called during the 2017 first quarter. We expect that such call features are more likely to be exercised during periods of rising interest rates. If this were to occur, we would need to either renew the borrowings at a potentially higher rate of interest, which would negatively impact our net interest income, or repay such borrowings. If we sell securities or other assets to fund the repayment of such borrowings, any decline in estimated market value with respect to the securities or assets sold would be realized and could result in a loss upon such sale.

Interest rates do and will continue to fluctuate. Although we cannot predict future Federal Open Market Committee, or FOMC, or FRB actions or other factors that will cause rates to change, the FOMC reaffirmed its view that an accommodative monetary policy stance remains appropriate. Despite the December 2015 and December 2016 actions by the FRB to raise short-term interest rates by 25 basis points in each instance, interest rates remain near historical lows and mortgage loan prepayments remain elevated. If long-term interest rates remain low, a flattening of the U.S. Treasury yield curve may continue and adversely impact our net interest rate spread and net interest margin. No assurance can be given that changes in interest rates or mortgage loan prepayments will not have a negative impact on our net interest income, net interest rate spread or net interest margin.

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

Our retail banking and a significant portion of our lending business (approximately 48% of our residential mortgage loan portfolio and substantially all of our multi-family and commercial real estate mortgage loan portfolio at December 31, 2016) are concentrated in the New York metropolitan area. As a result of this geographic concentration, our results of operations largely depend upon economic conditions in this area, although they also depend on economic conditions in other areas.

While housing and real estate market values have improved from the significant declines experienced from 2007 to 2014, we are still operating in a challenging economic environment, both nationally and locally. Unemployment levels have improved to 4.7% and the number of people re-entering the job market has increased. At December 31, 2016, the average loan-to-value ratio of our mortgage loan portfolio was less than 51% based on current principal balances and original appraised values. However, no assurance can be given that the original appraised values are reflective of current market conditions. Real estate values and home sales volumes and financial stress on borrowers as a result of

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the economic environment could have an adverse effect on our borrowers, which could adversely affect our results of operations, as well as adversely affect our financial condition.

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

Our profitability depends upon our continued ability to compete successfully in our market areas. 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. We face intense competition both in making loans and attracting deposits. Our competition for loans, both locally and nationally, comes principally from commercial banks, savings banks, savings and loan associations, mortgage banking companies and credit unions.

In recent years, we have expanded our multi-family and commercial real estate lending and business banking operations. These business lines are also being aggressively pursued by a number of competitors, both large and small. Our most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. We also face competition for deposits from money market mutual funds and other corporate and government securities funds as well as from other financial intermediaries such as brokerage firms and insurance companies. Price competition for loans and deposits could result in earning less on our loans and paying more on our deposits, which would reduce our net interest income. Competition also makes it more difficult to grow our loan and deposit balances.

In December 2016, the OCC announced that it would begin considering applications from financial technology companies to become special purpose national banks, and requested comments about how it can foster responsible innovation in the chartering process while continuing to provide robust oversight. In addition, as customer preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

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

Our policy generally has been to originate multi-family and commercial real estate mortgage loans in the New York metropolitan area. At December 31, 2016, multi-family mortgage loans totaled $4.05 billion, or 39% of our total loan portfolio, and commercial real estate mortgage loans totaled $729.3 million, or 7% of our total loan portfolio. Our combined multi-family and commercial real estate mortgage loan portfolio decreased $67.7 million, or 1%, from December 31, 2015 to December 31, 2016. Multi-family and commercial real estate mortgage loans generally involve a greater degree of credit risk than residential mortgage loans because they typically have larger balances and are more affected by adverse conditions in the economy. Because payments on loans secured by multi-family properties and commercial real estate often depend upon the successful operation and management of the properties and the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulation. In recent years, commercial real estate markets have been experiencing substantial growth, and increased competitive pressures have contributed significantly to historically low capitalization rates and rising property values. Commercial real estate prices, according to many U.S. commercial real estate indices, are currently above the 2007 peak levels that contributed to the financial crisis. Accordingly, the Agencies have expressed concerns about weaknesses in the current commercial real estate market. Our failure to adequately implement enhanced risk management policies, procedures and controls could adversely affect our ability to increase this portfolio going forward and could result in an increased rate of delinquencies in, and increased losses, from this portfolio. At December 31, 2016, non-performing multi-family and commercial real estate mortgage loans totaled $9.7 million, or 0.20% of our total portfolio of multi-family and commercial real estate mortgage loans.


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Loans in our residential mortgage loan portfolio which have recently shifted from interest-only to amortizing may expose us to increased risk of borrower delinquencies.

At December 31, 2016, our interest-only residential mortgage loan portfolio totaled $330.5 million, of which $278.9 million is scheduled to commence principal amortization during 2017. In addition, at December 31, 2016, $1.41 billion of residential mortgage loans originated in prior years as interest-only loans were included in our portfolio of amortizing residential mortgage loans. Such loans consist of $870.3 million of loans which converted pursuant to their contractual terms and $542.8 million of loans which were refinanced at an earlier stage through a program under which certain re-underwriting procedures were completed. After a refinance or conversion to an amortizing loan, a borrower’s monthly payment may increase by a substantial amount and the borrower may not be able to afford the increased monthly payment, which could result in increased delinquencies and, accordingly, adversely affect our results of operations. Of total loans which had previously been interest-only, $84.1 million were non-performing at December 31, 2016, the majority of which converted pursuant to their contractual terms.

The FASB’s recently adopted ASU 2016-13 will result in a significant change in how we recognize credit losses and may have a material impact on our financial condition or results of operations.

In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-13, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss model, or CECL. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

The new CECL standard will become effective for us for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. We are currently evaluating the impact the CECL model will have on our accounting, but we expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations.

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

We are a unitary savings and loan holding company currently regulated by the FRB and almost all of our operating assets are owned by Astoria Bank. We rely primarily on dividends from Astoria Bank to pay cash dividends to our stockholders, to engage in share repurchase programs and to pay principal and interest on our debt obligations. The OCC regulates all capital distributions by Astoria Bank directly or indirectly to us, including dividend payments. As the subsidiary of a savings and loan holding company, Astoria Bank must file a notice with the OCC at least 30 days prior to each capital distribution. If Astoria Bank does not qualify for expedited treatment under the OCC rules and regulations or 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 Bank must file an application to receive the approval of the OCC for a proposed capital distribution. During 2016, Astoria Bank was required to file such applications, but did not make a request to the OCC for capital

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distributions. Effective 2017, Astoria Bank is not required to file such applications, but is required to notify the OCC of its intent to pay future dividends. Astoria Bank must also provide notice to the FRB at least 30 days prior to declaring a dividend.

In addition, Astoria Bank 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 OCC notified Astoria Bank that it was in need of more than normal supervision. Under the prompt corrective action provisions of the FDIA, an insured depository institution such as Astoria Bank is prohibited from ma