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EX-31.1 - EXHIBIT 31.1 - ASTORIA FINANCIAL CORPaf20170331ex31d1.htm
EX-32.1 - EXHIBIT 32.1 - ASTORIA FINANCIAL CORPaf20170331ex32d1.htm
EX-31.2 - EXHIBIT 31.2 - ASTORIA FINANCIAL CORPaf20170331ex31d2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to        
Commission file number 001-11967
ASTORIA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
11-3170868
(State or other jurisdiction of
 
(I.R.S. Employer Identification
incorporation or organization)
 
Number)
 
 
 
One Astoria Bank Plaza, Lake Success, New York
 
11042-1085
(Address of principal executive offices)
 
(Zip Code)
(516) 327-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x  NO ¨
Indicate by check mark 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”in Rule 12b-2 of the Exchange Act.
Large accelerated filer x    Accelerated filer ¨    Non-accelerated filer ¨ (Do not check if a smaller reporting company)    Smaller reporting company ¨    Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨  NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Classes of Common Stock
 
Number of Shares Outstanding, April 28, 2017
 
$0.01 Par Value
 
101,725,639



 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




1


ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition

 
 
(Unaudited)
 
 
 
 
 
(In Thousands, Except Share Data)
At March 31, 2017
 
At December 31, 2016
Assets:
 
 

 
 
 
 

 
Cash and due from banks
 
$
139,272

 
 
 
$
129,944

 
Available-for-sale securities:
 
 

 
 
 
 

 
Encumbered
 
34,480

 
 
 
35,080

 
Unencumbered
 
231,419

 
 
 
244,965

 
Total available-for-sale securities
 
265,899

 
 
 
280,045

 
Held-to-maturity securities, fair value of $2,721,723 and $2,690,546, respectively:
 
 

 
 
 
 

 
Encumbered
 
1,170,447

 
 
 
1,194,685

 
Unencumbered
 
1,598,929

 
 
 
1,545,447

 
Total held-to-maturity securities
 
2,769,376

 
 
 
2,740,132

 
Federal Home Loan Bank of New York stock, at cost
 
107,166

 
 
 
124,807

 
Loans held-for-sale, net
 
6,236

 
 
 
11,584

 
Loans receivable
 
10,200,966

 
 
 
10,417,187

 
Allowance for loan losses
 
(82,500
)
 
 
 
(86,100
)
 
Loans receivable, net
 
10,118,466

 
 
 
10,331,087

 
Mortgage servicing rights, net
 
10,237

 
 
 
10,130

 
Accrued interest receivable
 
34,478

 
 
 
34,994

 
Premises and equipment, net
 
98,199

 
 
 
101,021

 
Goodwill
 
185,151

 
 
 
185,151

 
Bank owned life insurance
 
443,216

 
 
 
441,064

 
Real estate owned, net
 
13,500

 
 
 
15,144

 
Other assets
 
151,414

 
 
 
153,549

 
Total assets
 
$
14,342,610

 
 
 
$
14,558,652

 
Liabilities:
 
 

 
 
 
 

 
Deposits:
 
 

 
 
 
 

 
NOW and demand deposit
 
$
2,577,459

 
 
 
$
2,521,094

 
Money market
 
2,781,555

 
 
 
2,706,895

 
Savings
 
2,057,651

 
 
 
2,048,202

 
Certificates of deposit
 
1,573,582

 
 
 
1,600,864

 
Total deposits
 
8,990,247

 
 
 
8,877,055

 
Federal funds purchased
 
195,000

 
 
 
195,000

 
Securities sold under agreements to repurchase
 
1,100,000

 
 
 
1,100,000

 
Federal Home Loan Bank of New York advances
 
1,700,000

 
 
 
2,090,000

 
Other borrowings, net
 
249,885

 
 
 
249,752

 
Mortgage escrow funds
 
160,472

 
 
 
112,975

 
Accrued expenses and other liabilities
 
223,042

 
 
 
219,797

 
Total liabilities
 
12,618,646

 
 
 
12,844,579

 
Stockholders’ Equity:
 
 

 
 
 
 

 
Preferred stock, $1.00 par value; 5,000,000 shares authorized:
 
 

 
 
 
 

 
Series C (150,000 shares authorized; and 135,000 shares issued and outstanding)
 
129,796

 
 
 
129,796

 
Common stock, $0.01 par value (200,000,000 shares authorized; 166,494,888 shares issued; and 101,731,174 and 101,210,478 shares outstanding, respectively)
 
1,665

 
 
 
1,665

 
Additional paid-in capital
 
821,856

 
 
 
830,417

 
Retained earnings
 
2,163,528

 
 
 
2,155,785

 
Treasury stock (64,763,714 and 65,284,410 shares, at cost, respectively)
 
(1,335,968
)
 
 
 
(1,346,709
)
 
Accumulated other comprehensive loss
 
(56,913
)
 
 
 
(56,881
)
 
Total stockholders’ equity
 
1,723,964

 
 
 
1,714,073

 
Total liabilities and stockholders’ equity
 
$
14,342,610

 
 
 
$
14,558,652

 
See accompanying Notes to Consolidated Financial Statements.

2


ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)

 
For the 
 Three Months Ended 
 March 31,
(In Thousands, Except Share Data)
2017
 
2016
Interest income:
 

 
 

Residential mortgage loans
$
44,060

 
$
47,375

Multi-family and commercial real estate mortgage loans
43,406

 
46,805

Consumer and other loans
2,292

 
2,372

Mortgage-backed and other securities
18,000

 
16,904

Interest-earning cash accounts
161

 
120

Federal Home Loan Bank of New York stock
1,794

 
1,421

Total interest income
109,713

 
114,997

Interest expense:
 

 
 

Deposits
6,359

 
7,462

Borrowings
23,239

 
24,283

Total interest expense
29,598

 
31,745

Net interest income
80,115

 
83,252

Provision for loan losses credited to operations
(2,486
)
 
(3,127
)
Net interest income after provision for loan losses
82,601

 
86,379

Non-interest income:
 

 
 

Customer service fees
6,609

 
6,988

Other loan fees
595

 
534

Gain on sales of securities

 
86

Mortgage banking income (loss), net
1,294

 
(37
)
Income from bank owned life insurance
2,152

 
2,289

Other
1,224

 
1,541

Total non-interest income
11,874

 
11,401

Non-interest expense:
 

 
 

General and administrative:
 

 
 

Compensation and benefits
36,997

 
38,253

Occupancy, equipment and systems
20,212

 
19,391

Federal deposit insurance premium
2,298

 
3,530

Advertising
589

 
1,453

Other
11,868

 
6,895

Total non-interest expense
71,964

 
69,522

Income before income tax expense
22,511

 
28,258

Income tax expense
8,104

 
9,693

Net income
14,407

 
18,565

Preferred stock dividends
2,194

 
2,194

Net income available to common shareholders
$
12,213

 
$
16,371

 
 
 
 
Basic earnings per common share
$
0.12

 
$
0.16

Diluted earnings per common share
$
0.12

 
$
0.16

 
 
 
 
Basic weighted average common shares outstanding
100,585,603

 
100,368,931

Diluted weighted average common shares outstanding
100,585,603

 
100,368,931


See accompanying Notes to Consolidated Financial Statements.

3


ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)

 
For the 
 Three Months Ended 
 March 31,
(In Thousands)
2017
 
2016
 
 
 
 
Net income
$
14,407

 
$
18,565

 
 
 
 
Other comprehensive (loss) income, net of tax:
 

 
 

Net unrealized (loss) gain on securities available-for-sale:
 
 
 
Net unrealized holding (loss) gain on securities arising during the period
(432
)
 
4,036

Reclassification adjustment for gain on sales of securities included in net income

 
(51
)
Net unrealized (loss) gain on securities available-for-sale
(432
)
 
3,985

 
 
 
 
Reclassification adjustment for net actuarial loss on pension plans and other postretirement benefits included in net income
371

 
397

 
 
 
 
Reclassification adjustment for prior service cost on pension plans and other postretirement benefits included in net income
29

 
28

 
 
 
 
Total other comprehensive (loss) income, net of tax
(32
)
 
4,410

 
 
 
 
Comprehensive income
$
14,375

 
$
22,975


See accompanying Notes to Consolidated Financial Statements.


4


ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)
For the Three Months Ended March 31, 2017 and 2016

(In Thousands, Except Share Data)
Total
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
1,714,073

 
$
129,796

 
$
1,665

 
$
830,417

 
$
2,155,785

 
$
(1,346,709
)
 
 
$
(56,881
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
14,407

 

 

 

 
14,407

 

 
 

 
Other comprehensive loss, net of tax
(32
)
 

 

 

 

 

 
 
(32
)
 
Dividends on preferred stock ($16.25 per share)
(2,194
)
 

 

 

 
(2,194
)
 

 
 

 
Dividends on common stock ($0.04 per share)
(4,049
)
 

 

 

 
(4,049
)
 

 
 

 
Sales of treasury stock (1,822 shares)
34

 

 

 

 
(4
)
 
38

 
 

 
Restricted stock grants (521,784 shares)

 

 

 
(10,329
)
 
(434
)
 
10,763

 
 

 
Forfeitures of restricted stock (2,910 shares)

 

 

 
43

 
17

 
(60
)
 
 

 
Stock-based compensation
1,725

 

 

 
1,725

 

 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2017
$
1,723,964

 
$
129,796

 
$
1,665

 
$
821,856

 
$
2,163,528

 
$
(1,335,968
)
 
 
$
(56,913
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
1,663,448

 
$
129,796

 
$
1,665

 
$
902,349

 
$
2,045,391

 
$
(1,357,136
)
 
 
$
(58,617
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
18,565

 

 

 

 
18,565

 

 
 

 
Other comprehensive income, net of tax
4,410

 

 

 

 

 

 
 
4,410

 
Dividends on preferred stock ($16.25 per share)
(2,194
)
 

 

 

 
(2,194
)
 

 
 

 
Dividends on common stock ($0.04 per share)
(4,053
)
 

 

 

 
(4,053
)
 

 
 

 
Sales of treasury stock (2,710 shares)
41

 

 

 

 
(15
)
 
56

 
 

 
Restricted stock grants (685,872 shares)

 

 

 
(10,329
)
 
(3,823
)
 
14,152

 
 

 
Forfeitures of restricted stock (3,390 shares)

 

 

 
45

 
25

 
(70
)
 
 

 
Stock-based compensation
1,581

 

 

 
1,580

 
1

 

 
 

 
Net tax benefit excess from stock-based compensation
3

 

 

 
3

 

 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2016
$
1,681,801

 
$
129,796

 
$
1,665

 
$
893,648

 
$
2,053,897

 
$
(1,342,998
)
 
 
$
(54,207
)
 

See accompanying Notes to Consolidated Financial Statements.


5


ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)

 
For the Three Months Ended March 31,
(In Thousands)
2017
 
2016
Cash flows from operating activities:
 
 

 
 
 
 

 
Net income
 
$
14,407

 
 
 
$
18,565

 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 
 
 

 
Net amortization on loans
 
2,136

 
 
 
2,310

 
Net amortization on securities and borrowings
 
1,601

 
 
 
1,822

 
Net provision for loan and real estate losses credited to operations
 
(2,084
)
 
 
 
(2,918
)
 
Depreciation and amortization
 
3,422

 
 
 
3,694

 
Net gain on sales of loans and securities
 
(610
)
 
 
 
(518
)
 
Mortgage servicing rights amortization and valuation allowance adjustments, net
 
238

 
 
 
1,404

 
Stock-based compensation
 
1,725

 
 
 
1,581

 
Deferred income tax (benefit) expense
 
(1,695
)
 
 
 
75

 
Originations of loans held-for-sale
 
(30,585
)
 
 
 
(27,258
)
 
Proceeds from sales and principal repayments of loans held-for-sale
 
36,198

 
 
 
28,288

 
Decrease (increase) in accrued interest receivable
 
516

 
 
 
(1,143
)
 
Bank owned life insurance income and insurance proceeds received, net
 
(2,152
)
 
 
 
(2,289
)
 
Decrease in other assets
 
3,935

 
 
 
2,572

 
Increase in accrued expenses and other liabilities
 
3,916

 
 
 
1,219

 
Net cash provided by operating activities
 
30,968

 
 
 
27,404

 
Cash flows from investing activities:
 
 

 
 
 
 

 
Originations of loans receivable
 
(203,866
)
 
 
 
(309,871
)
 
Loan purchases through third parties
 
(59,167
)
 
 
 
(29,048
)
 
Principal payments on loans receivable
 
471,853

 
 
 
482,897

 
Proceeds from sales of delinquent and non-performing loans
 
300

 
 
 
400

 
Purchases of securities held-to-maturity
 
(192,645
)
 
 
 
(354,392
)
 
Principal payments on securities held-to-maturity
 
162,092

 
 
 
206,196

 
Principal payments on securities available-for-sale
 
13,279

 
 
 
11,447

 
Proceeds from sales of securities available-for-sale
 

 
 
 
23,065

 
Purchases of Federal Home Loan Bank of New York stock
 
(5,286
)
 
 
 
(25,548
)
 
Redemptions of Federal Home Loan Bank of New York stock
 
22,927

 
 
 
25,103

 
Proceeds from sales of real estate owned, net
 
4,993

 
 
 
7,863

 
Purchases of premises and equipment, net of proceeds from sales
 
(600
)
 
 
 
(2,108
)
 
Net cash provided by investing activities
 
213,880

 
 
 
36,004

 
Cash flows from financing activities:
 
 

 
 
 
 

 
Net increase (decrease) in deposits
 
113,192

 
 
 
(54,488
)
 
Net increase (decrease) in borrowings with original terms of three months or less
 
110,000

 
 
 
(270,000
)
 
Proceeds from borrowings with terms greater than three months
 
300,000

 
 
 
550,000

 
Repayments of borrowings with original terms greater than three months
 
(800,000
)
 
 
 
(345,000
)
 
Net increase in mortgage escrow funds
 
47,497

 
 
 
47,796

 
Proceeds from sales of treasury stock
 
34

 
 
 
41

 
Cash dividends paid to stockholders
 
(6,243
)
 
 
 
(6,247
)
 
Net tax benefit excess from stock-based compensation
 

 
 
 
3

 
Net cash used in financing activities
 
(235,520
)
 
 
 
(77,895
)
 
Net increase (decrease) in cash and cash equivalents
 
9,328

 
 
 
(14,487
)
 
Cash and cash equivalents at beginning of period
 
129,944

 
 
 
200,538

 
Cash and cash equivalents at end of period
 
$
139,272

 
 
 
$
186,051

 
 
 
 
 
 
 
 
 
Supplemental disclosures:
 
 

 
 
 
 

 
Interest paid
 
$
27,024

 
 
 
$
27,977

 
Income taxes paid
 
$
269

 
 
 
$
4,613

 
Additions to real estate owned
 
$
3,755

 
 
 
$
965

 
Loans transferred to held-for-sale
 
$
300

 
 
 
$

 

See accompanying Notes to Consolidated Financial Statements.

6


ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

1.    Basis of Presentation

The accompanying consolidated financial statements include the accounts of Astoria Financial Corporation and its wholly-owned subsidiaries: Astoria Bank and its subsidiaries, referred to as Astoria Bank, and AF Insurance Agency, Inc.  As used in this quarterly report, "Astoria," “we,” “us” and “our” refer to Astoria Financial Corporation and its consolidated subsidiaries.  All significant inter-company accounts and transactions have been eliminated in consolidation.

In our opinion, the accompanying consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of March 31, 2017 and December 31, 2016, our results of operations and other comprehensive income for the three months ended March 31, 2017 and 2016, changes in our stockholders’ equity for the three months ended March 31, 2017 and 2016 and our cash flows for the three months ended March 31, 2017 and 2016.  In preparing the consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities for the consolidated statements of financial condition as of March 31, 2017 and December 31, 2016, and amounts of revenues, expenses and other comprehensive income in the consolidated statements of income and comprehensive income for the three months ended March 31, 2017 and 2016.  The results of operations and other comprehensive income for the three months ended March 31, 2017 are not necessarily indicative of the results of operations and other comprehensive income to be expected for the remainder of the year.  Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or GAAP, have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC.

These consolidated financial statements should be read in conjunction with our December 31, 2016 audited consolidated financial statements and related notes included in our 2016 Annual Report on Form 10-K.


2.    Merger Agreement with Sterling Bancorp

On March 6, 2017, Astoria entered into an Agreement and Plan of Merger, or the Sterling Merger Agreement, with Sterling Bancorp, a Delaware corporation, or Sterling. The Sterling Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Astoria will merge with and into Sterling, with Sterling as the surviving corporation, such merger referred to as the Sterling Merger. Immediately following the consummation of the Sterling Merger, Astoria’s wholly owned subsidiary, Astoria Bank, will merge with and into Sterling’s wholly owned subsidiary, Sterling National Bank, such merger referred to as the Sterling Bank Merger. Sterling National Bank will be the surviving entity in the Sterling Bank Merger. The Sterling Merger Agreement was unanimously approved and adopted by the Board of Directors of each of Astoria and Sterling.

Subject to the terms and conditions of the Sterling Merger Agreement, at the effective time of the Sterling Merger, or the Effective Time, Astoria stockholders will have the right to receive 0.875 shares of common stock, par value $0.01 per share, of Sterling, or Sterling Common Stock, for each share of common stock, par value $0.01 per share, of Astoria Financial Corporation, or Astoria Common Stock. Also in the Sterling Merger, each share of Astoria 6.50% Non-Cumulative Perpetual Preferred Stock, Series C, par value $1.00 per share, with a liquidation preference of $1,000 per share, issued and outstanding immediately prior to the

7


Effective Time will be automatically converted into the right to receive one share of Sterling 6.50% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $1,000 per share.

The Sterling Merger Agreement contains customary representations and warranties from both Astoria and Sterling, and each party has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of Astoria’s and Sterling’s businesses during the interim period between the execution of the Sterling Merger Agreement and the Effective Time, (2) the obligation of Sterling to call a meeting of its stockholders to adopt the Sterling Merger Agreement and approve an amendment to its charter to increase the authorized shares of Sterling Common Stock from 190 million to 310 million, and, subject to certain exceptions, to recommend that its stockholders adopt the Sterling Merger Agreement and the transactions contemplated thereby, (3) the obligation of Astoria to call a meeting of its stockholders to adopt the Sterling Merger Agreement, and, subject to certain exceptions, to recommend that its stockholders adopt the Sterling Merger Agreement, and (4) Astoria’s non-solicitation obligations relating to alternative acquisition proposals. Astoria and Sterling have agreed to use their reasonable best efforts to prepare and file all applications, notices, and other documents to obtain all necessary consents and approvals for consummation of the transactions contemplated by the Sterling Merger Agreement.

The completion of the Sterling Merger is subject to customary conditions, including (1) adoption of the Sterling Merger Agreement by Astoria’s stockholders, (2) adoption of the Sterling Merger Agreement and approval of the Sterling charter amendment by Sterling’s stockholders, (3) authorization for listing on the New York Stock Exchange of the shares of Sterling Common Stock to be issued in the Sterling Merger, (4) the receipt of required regulatory approvals, including the approval of the Board of Governors of the Federal Reserve System, or FRB, and the Office of the Comptroller of the Currency, or OCC, (5) effectiveness of the registration statement on Form S-4 for the Sterling Common Stock to be issued in the Sterling Merger, and (6) the absence of any order, injunction or other legal restraint preventing the completion of the Sterling Merger or making the completion of the Sterling Merger illegal. The registration statement on Form S-4 for the Sterling Common Stock to be issued in the Sterling Merger was filed on April 5, 2017 and was declared effective by the SEC on April 28, 2017. Special meetings of Astoria’s and Sterling’s respective stockholders are scheduled to be held on June 13, 2017, at which Astoria’s stockholders will vote on the Sterling Merger Agreement and Sterling’s stockholders will vote on the Sterling Merger Agreement and the Sterling charter amendment. In addition, all applications and notices necessary to obtain the required regulatory approvals to complete the Sterling Merger have been submitted or sent by Astoria or Sterling.

Each party’s obligation to complete the Sterling Merger is also subject to certain additional customary conditions, including (1) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (2) performance in all material respect by the other party of its obligations under the Sterling Merger Agreement, and (3) receipt by such party of an opinion from its counsel to the effect that the Sterling Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code.

The Sterling Merger Agreement also provides certain termination rights for both Astoria and Sterling and further provides that a termination fee of $75.7 million will be payable by either Astoria or Sterling, as applicable, upon termination of the Sterling Merger Agreement under certain circumstances.



8


3.    Securities

The following tables set forth the amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at the dates indicated.
 
At March 31, 2017
(In Thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Available-for-sale:
 

 
 
 

 
 
 
 

 
 
 

Residential mortgage-backed securities:
 

 
 
 

 
 
 
 

 
 
 

GSE (1) issuance REMICs and CMOs (2)
$
229,367

 
 
$
1,311

 
 
 
$
(3,386
)
 
 
$
227,292

Non-GSE issuance REMICs and CMOs
1,141

 
 

 
 
 
(5
)
 
 
1,136

GSE pass-through certificates
8,239

 
 
339

 
 
 
(2
)
 
 
8,576

Total residential mortgage-backed securities
238,747

 
 
1,650

 
 
 
(3,393
)
 
 
237,004

Obligations of GSEs
30,000

 
 

 
 
 
(1,107
)
 
 
28,893

Fannie Mae stock
15

 
 

 
 
 
(13
)
 
 
2

Total securities available-for-sale
$
268,762

 
 
$
1,650

 
 
 
$
(4,513
)
 
 
$
265,899

Held-to-maturity:
 

 
 
 

 
 
 
 

 
 
 

Residential mortgage-backed securities:
 

 
 
 

 
 
 
 

 
 
 

GSE issuance REMICs and CMOs
$
1,182,307

 
 
$
4,893

 
 
 
$
(11,311
)
 
 
$
1,175,889

Non-GSE issuance REMICs and CMOs
191

 
 

 
 
 
(7
)
 
 
184

GSE pass-through certificates
221,058

 
 
909

 
 
 
(2,384
)
 
 
219,583

Total residential mortgage-backed securities
1,403,556

 
 
5,802

 
 
 
(13,702
)
 
 
1,395,656

Multi-family mortgage-backed securities:
 

 
 
 

 
 
 
 

 
 
 

GSE issuance REMICs
906,183

 
 
217

 
 
 
(19,581
)
 
 
886,819

Obligations of GSEs
379,316

 
 
23

 
 
 
(16,249
)
 
 
363,090

Corporate Debt securities
80,000

 
 

 
 
 
(4,163
)
 
 
75,837

Other
321

 
 

 
 
 

 
 
321

Total securities held-to-maturity
$
2,769,376

 
 
$
6,042

 
 
 
$
(53,695
)
 
 
$
2,721,723


(1)
Government-sponsored enterprise
(2)
Real estate mortgage investment conduits and collateralized mortgage obligations

9


 
At December 31, 2016
(In Thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Available-for-sale:
 

 
 
 

 
 
 
 

 
 
 

Residential mortgage-backed securities:
 

 
 
 

 
 
 
 

 
 
 

GSE issuance REMICs and CMOs
$
242,172

 
 
$
1,327

 
 
 
$
(2,706
)
 
 
$
240,793

Non-GSE issuance REMICs and CMOs
1,442

 
 
2

 
 
 
(1
)
 
 
1,443

GSE pass-through certificates
8,571

 
 
361

 
 
 
(2
)
 
 
8,930

Total residential mortgage-backed securities
252,185

 
 
1,690

 
 
 
(2,709
)
 
 
251,166

Obligations of GSEs
30,000

 
 

 
 
 
(1,125
)
 
 
28,875

Fannie Mae stock
15

 
 

 
 
 
(11
)
 
 
4

Total securities available-for-sale
$
282,200

 
 
$
1,690

 
 
 
$
(3,845
)
 
 
$
280,045

Held-to-maturity:
 

 
 
 

 
 
 
 

 
 
 

Residential mortgage-backed securities:
 

 
 
 

 
 
 
 

 
 
 

GSE issuance REMICs and CMOs
$
1,119,175

 
 
$
4,896

 
 
 
$
(11,957
)
 
 
$
1,112,114

Non-GSE issuance REMICs and CMOs
193

 
 

 
 
 
(7
)
 
 
186

GSE pass-through certificates
228,976

 
 
665

 
 
 
(3,282
)
 
 
226,359

Total residential mortgage-backed securities
1,348,344

 
 
5,561

 
 
 
(15,246
)
 
 
1,338,659

Multi-family mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
GSE issuance REMICs
927,119

 
 
363

 
 
 
(19,290
)
 
 
908,192

Obligations of GSEs
384,325

 
 
54

 
 
 
(16,510
)
 
 
367,869

Corporate debt securities
80,000

 
 

 
 
 
(4,518
)
 
 
75,482

Other
344

 
 

 
 
 

 
 
344

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

 
 
$
5,978

 
 
 
$
(55,564
)
 
 
$
2,690,546


The following contractual maturity table sets forth certain information regarding the amortized costs and estimated fair values of our securities available-for-sale and securities held-to-maturity at March 31, 2017 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 (all of which are callable in 2017 and at various times thereafter).
 
March 31, 2017
 
Available-for-Sale
 
Held-to-Maturity
(Dollars in Thousands)
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Securities remaining period to contractual maturity:
 
 
 
 
 
 
 
 
 
 
 
Within one year
 
$
202

 
 
 
$
204

 
 
$
34,977

 
$
34,979

Over one to five years
 
1,333

 
 
 
1,329

 
 
17,522

 
17,541

Over five to ten years
 
36,822

 
 
 
35,912

 
 
406,424

 
389,288

Over ten years
 
230,405

 
 
 
228,454

 
 
2,310,453

 
2,279,915

Total securities
 
$
268,762

 
 
 
$
265,899

 
 
$
2,769,376

 
$
2,721,723



10


The following tables set forth the estimated fair values of securities with gross unrealized losses at the dates indicated, segregated between securities that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve months or longer at the dates indicated.
 
At March 31, 2017
 
 
Less Than Twelve Months
 
Twelve Months or Longer
 
Total
 
(In Thousands)
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
Available-for-sale:
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
Residential mortgage-backed securities:
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
GSE issuance REMICs and CMOs
$
113,064

 
 
$
(2,634
)
 
 
$
19,720

 
 
$
(752
)
 
 
$
132,784

 
 
$
(3,386
)
 
Non-GSE issuance REMICs and CMOs
1,022

 
 
(4
)
 
 
81

 
 
(1
)
 
 
1,103

 
 
(5
)
 
GSE pass-through certificates
62

 
 
(1
)
 
 
59

 
 
(1
)
 
 
121

 
 
(2
)
 
Obligations of GSEs
28,893

 
 
(1,107
)
 
 

 
 

 
 
28,893

 
 
(1,107
)
 
Fannie Mae stock

 
 

 
 
2

 
 
(13
)
 
 
2

 
 
(13
)
 
Total temporarily impaired securities
available-for-sale
$
143,041

 
 
$
(3,746
)
 
 
$
19,862

 
 
$
(767
)
 
 
$
162,903

 
 
$
(4,513
)
 
Held-to-maturity:
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
Residential mortgage-backed securities:
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
GSE issuance REMICs and CMOs
$
569,367

 
 
$
(7,110
)
 
 
$
125,051

 
 
$
(4,201
)
 
 
$
694,418

 
 
$
(11,311
)
 
Non-GSE issuance REMICs and CMOs

 
 

 
 
184

 
 
(7
)
 
 
184

 
 
(7
)
 
GSE pass-through certificates
81,074

 
 
(1,235
)
 
 
60,450

 
 
(1,149
)
 
 
141,524

 
 
(2,384
)
 
Multi-family mortgage-backed securities:
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
GSE issuance REMICs
834,947

 
 
(19,581
)
 
 

 
 

 
 
834,947

 
 
(19,581
)
 
Obligations of GSEs
311,690

 
 
(16,249
)
 
 

 
 

 
 
311,690

 
 
(16,249
)
 
Corporate debt securities
9,327

 
 
(673
)
 
 
66,510

 
 
(3,490
)
 
 
75,837

 
 
(4,163
)
 
Total temporarily impaired securities
held-to-maturity
$
1,806,405

 
 
$
(44,848
)
 
 
$
252,195

 
 
$
(8,847
)
 
 
$
2,058,600

 
 
$
(53,695
)
 
 
At December 31, 2016
 
 
Less Than Twelve Months
 
Twelve Months or Longer
 
Total
 
(In Thousands)
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
Available-for-sale:
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
Residential mortgage-backed securities:
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
GSE issuance REMICs and CMOs
$
140,638

 
 
$
(1,886
)
 
 
$
20,026

 
 
$
(820
)
 
 
$
160,664

 
 
$
(2,706
)
 
Non-GSE issuance REMICs and CMOs

 
 

 
 
92

 
 
(1
)
 
 
92

 
 
(1
)
 
GSE pass-through certificates
71

 
 
(1
)
 
 
90

 
 
(1
)
 
 
161

 
 
(2
)
 
Obligations of GSEs
28,875

 
 
(1,125
)
 
 

 
 

 
 
28,875

 
 
(1,125
)
 
Fannie Mae stock

 
 

 
 
4

 
 
(11
)
 
 
4

 
 
(11
)
 
Total temporarily impaired securities
available-for-sale
$
169,584

 
 
$
(3,012
)
 
 
$
20,212

 
 
$
(833
)
 
 
$
189,796

 
 
$
(3,845
)
 
Held-to-maturity:
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
Residential mortgage-backed securities:
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
GSE issuance REMICs and CMOs
$
515,537

 
 
$
(7,457
)
 
 
$
131,629

 
 
$
(4,500
)
 
 
$
647,166

 
 
$
(11,957
)
 
Non-GSE issuance REMICs and CMOs

 
 

 
 
186

 
 
(7
)
 
 
186

 
 
(7
)
 
GSE pass-through certificates
104,538

 
 
(1,775
)
 
 
61,872

 
 
(1,507
)
 
 
166,410

 
 
(3,282
)
 
Multi-family mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 


 
 


 
GSE issuance REMICs
871,436

 
 
(19,290
)
 
 

 
 

 
 
871,436

 
 
(19,290
)
 
Obligations of GSEs
296,427

 
 
(16,510
)
 
 

 
 

 
 
296,427

 
 
(16,510
)
 
Corporate debt securities
37,785

 
 
(2,216
)
 
 
37,698

 
 
(2,302
)
 
 
75,483

 
 
(4,518
)
 
Total temporarily impaired securities
held-to-maturity
$
1,825,723

 
 
$
(47,248
)
 
 
$
231,385

 
 
$
(8,316
)
 
 
$
2,057,108

 
 
$
(55,564
)
 


11


We held 195 securities which had an unrealized loss at March 31, 2017 and 188 securities which had an unrealized loss at December 31, 2016.  Securities in unrealized loss positions are analyzed as part of our ongoing assessment of other-than-temporary impairment. Our assertion regarding our intent not to sell, or that it is not more likely than not that we will be required to sell a security before its anticipated recovery, is based on a number of factors, including a quantitative estimate of the expected recovery period (which may extend to maturity), and our intended strategy with respect to the identified security or portfolio. If we do have the intent to sell, or believe it is more likely than not that we will be required to sell the security before its anticipated recovery, the unrealized loss is charged directly to earnings in the Consolidated Statements of Income and Comprehensive Income. Other factors considered in determining whether or not an impairment is temporary include the severity of the impairment; the duration of the impairment; the cause of the impairment; the near-term prospects of the issuer; and the estimated recovery period. The unrealized losses on our residential and multi-family mortgage-backed securities and GSE obligations at March 31, 2017 were primarily caused by movements in market interest rates subsequent to the purchase of such securities or obligations. The unrealized losses on our corporate debt obligations were primarily due to the observed credit spread widening that occurred during the three months ended March 31, 2017, which we attribute to the contemporaneous broad-based equity market volatility. We do not consider these unrealized losses to be other than temporary impairment.

There were no sales of securities from the available-for-sale portfolio during the three months ended March 31, 2017. During the three months ended March 31, 2016, proceeds from sales of securities from the available-for-sale portfolio totaled $23.1 million, resulting in gross realized gains of $86,000.

At March 31, 2017, available-for-sale debt securities, excluding mortgage-backed securities, had an amortized cost of $30.0 million, an estimated fair value of $28.9 million and contractual maturities in 2025 and 2026At March 31, 2017, held-to-maturity debt securities, excluding mortgage-backed securities, had an amortized cost of $459.6 million, an estimated fair value of $439.2 million and contractual maturities primarily in 2017 through 2027.  Actual maturities may differ from contractual maturities because issuers may have the right to prepay or call obligations with or without prepayment penalties.

At March 31, 2017, the amortized cost of callable securities in our portfolio totaled $374.3 million, which are callable in 2017 and at various times thereafter. The balance of accrued interest receivable for securities totaled $8.3 million at March 31, 2017 and $8.1 million at December 31, 2016.




12


4.    Loans Receivable and Allowance for Loan Losses

The following tables set forth the composition of our loans receivable portfolio, and an aging analysis by accruing and non-accrual loans, by segment and class at the dates indicated.
 
At March 31, 2017
 
Past Due
 
 
 
 
 
 
(In Thousands)
30-59
Days
 
60-89
Days
 
90 Days
or More
 
Total
Past Due
 
Current
 
Total
Accruing loans:
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans (gross):
 

 
 

 
 

 
 

 
 

 
 

Residential:
 

 
 

 
 

 
 

 
 

 
 

Full documentation interest-only
$
1,120

 
$

 
$

 
$
1,120

 
$
166,790

 
$
167,910

Full documentation amortizing
32,903

 
5,047

 

 
37,950

 
4,240,703

 
4,278,653

Reduced documentation interest-only
2,186

 
302

 

 
2,488

 
54,181

 
56,669

Reduced documentation amortizing
22,149

 
9,375

 

 
31,524

 
554,455

 
585,979

Total residential
58,358

 
14,724

 

 
73,082

 
5,016,129

 
5,089,211

Multi-family
5,162

 
151

 

 
5,313

 
4,014,746

 
4,020,059

Commercial real estate
1,695

 
521

 
1,639

 
3,855

 
692,064

 
695,919

Total mortgage loans
65,215

 
15,396

 
1,639

 
82,250

 
9,722,939

 
9,805,189

Consumer and other loans (gross):
 

 
 

 
 

 
 

 
 

 
 

Home equity and other consumer
1,609

 
495

 

 
2,104

 
128,610

 
130,714

Commercial and industrial
375

 

 

 
375

 
90,567

 
90,942

Total consumer and other loans
1,984

 
495

 

 
2,479

 
219,177

 
221,656

Total accruing loans
$
67,199

 
$
15,891

 
$
1,639

 
$
84,729

 
$
9,942,116


$
10,026,845

Non-accrual loans:
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans (gross):
 

 
 

 
 

 
 

 
 

 
 

Residential:
 

 
 

 
 

 
 

 
 

 
 

Full documentation interest-only
$

 
$

 
$
9,073

 
$
9,073

 
$
877

 
$
9,950

Full documentation amortizing
2,353

 
498

 
45,117

 
47,968

 
9,273

 
57,241

Reduced documentation interest-only

 

 
9,503

 
9,503

 
1,919

 
11,422

Reduced documentation amortizing
929

 
884

 
35,286

 
37,099

 
9,847

 
46,946

Total residential
3,282

 
1,382

 
98,979

 
103,643

 
21,916

 
125,559

Multi-family
437

 
396

 
558

 
1,391

 
2,314

 
3,705

Commercial real estate
680

 

 
627

 
1,307

 
3,649

 
4,956

Total mortgage loans
4,399

 
1,778

 
100,164

 
106,341

 
27,879

 
134,220

Consumer and other loans (gross):
 

 
 

 
 

 
 

 
 

 
 

Home equity and other consumer

 

 
4,139

 
4,139

 

 
4,139

Commercial and industrial

 

 
32

 
32

 

 
32

Total consumer and other loans

 

 
4,171

 
4,171

 

 
4,171

Total non-accrual loans
$
4,399

 
$
1,778


$
104,335


$
110,512


$
27,879


$
138,391

Total loans:
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans (gross):
 

 
 

 
 

 
 

 
 

 
 

Residential:
 

 
 

 
 

 
 

 
 

 
 

Full documentation interest-only
$
1,120

 
$

 
$
9,073

 
$
10,193

 
$
167,667

 
$
177,860

Full documentation amortizing
35,256

 
5,545

 
45,117

 
85,918

 
4,249,976

 
4,335,894

Reduced documentation interest-only
2,186

 
302

 
9,503

 
11,991

 
56,100

 
68,091

Reduced documentation amortizing
23,078

 
10,259

 
35,286

 
68,623

 
564,302

 
632,925

Total residential
61,640

 
16,106

 
98,979

 
176,725

 
5,038,045

 
5,214,770

Multi-family
5,599

 
547

 
558

 
6,704

 
4,017,060

 
4,023,764

Commercial real estate
2,375

 
521

 
2,266

 
5,162

 
695,713

 
700,875

Total mortgage loans
69,614

 
17,174

 
101,803

 
188,591

 
9,750,818

 
9,939,409

Consumer and other loans (gross):


 
 
 
 
 
 

 
 
 
 

Home equity and other consumer
1,609

 
495

 
4,139

 
6,243

 
128,610

 
134,853

Commercial and industrial
375

 

 
32

 
407

 
90,567

 
90,974

Total consumer and other loans
1,984

 
495

 
4,171

 
6,650

 
219,177

 
225,827

Total loans
$
71,598

 
$
17,669

 
$
105,974

 
$
195,241

 
$
9,969,995

 
$
10,165,236

Net unamortized premiums and deferred loan
origination costs
 

 
 

 
 

 
 

 
 

 
35,730

Loans receivable
 

 
 

 
 

 
 

 
 

 
10,200,966

Allowance for loan losses
 

 
 

 
 

 
 

 
 

 
(82,500
)
Loans receivable, net
 

 
 

 
 

 
 

 
 

 
$
10,118,466


13


 
At December 31, 2016
 
Past Due
 
 
 
 
 
 
(In Thousands)
30-59
Days
 
60-89
Days
 
90 Days
or More
 
Total
Past Due
 
Current
 
Total
Accruing loans:
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans (gross):
 

 
 

 
 

 
 

 
 

 
 

Residential:
 

 
 

 
 

 
 

 
 

 
 

Full documentation interest-only
$
1,476

 
$
3,104

 
$

 
$
4,580

 
$
212,316

 
$
216,896

Full documentation amortizing
36,563

 
8,217

 

 
44,780

 
4,300,620

 
4,345,400

Reduced documentation interest-only
2,974

 
779

 

 
3,753

 
80,416

 
84,169

Reduced documentation amortizing
27,449

 
5,222

 

 
32,671

 
552,233

 
584,904

Total residential
68,462

 
17,322

 

 
85,784

 
5,145,585

 
5,231,369

Multi-family
1,060

 
795

 

 
1,855

 
4,040,386

 
4,042,241

Commercial real estate
2,043

 
1,298

 

 
3,341

 
720,582

 
723,923

Total mortgage loans
71,565

 
19,415

 

 
90,980

 
9,906,553

 
9,997,533

Consumer and other loans (gross):
 

 
 

 
 

 
 

 
 

 
 

Home equity and other consumer
1,281

 
550

 

 
1,831

 
133,024

 
134,855

Commercial and industrial

 
647

 

 
647

 
99,087

 
99,734

Total consumer and other loans
1,281

 
1,197

 

 
2,478

 
232,111

 
234,589

Total accruing loans
$
72,846

 
$
20,612

 
$

 
$
93,458

 
$
10,138,664

 
$
10,232,122

Non-accrual loans:
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans (gross):
 

 
 

 
 

 
 

 
 

 
 

Residential:
 

 
 

 
 

 
 

 
 

 
 

Full documentation interest-only
$
437

 
$

 
$
11,605

 
$
12,042

 
$
2,048

 
$
14,090

Full documentation amortizing
2,469

 

 
42,983

 
45,452

 
11,753

 
57,205

Reduced documentation interest-only

 

 
11,624

 
11,624

 
3,768

 
15,392

Reduced documentation amortizing
1,077

 
992

 
35,351

 
37,420

 
9,887

 
47,307

Total residential
3,983

 
992

 
101,563

 
106,538

 
27,456

 
133,994

Multi-family
428

 
611

 
1,244

 
2,283

 
2,098

 
4,381

Commercial real estate
219

 

 

 
219

 
5,117

 
5,336

Total mortgage loans
4,630

 
1,603

 
102,807

 
109,040

 
34,671

 
143,711

Consumer and other loans (gross):
 

 
 

 
 

 
 

 
 

 
 

Home equity and other consumer

 

 
4,483

 
4,483

 

 
4,483

Commercial and industrial

 

 
42

 
42

 

 
42

Total consumer and other loans

 

 
4,525

 
4,525

 

 
4,525

Total non-accrual loans
$
4,630

 
$
1,603

 
$
107,332

 
$
113,565

 
$
34,671

 
$
148,236

Total loans:
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans (gross):
 

 
 

 
 

 
 

 
 

 
 

Residential:
 

 
 

 
 

 
 

 
 

 
 

Full documentation interest-only
$
1,913

 
$
3,104

 
$
11,605

 
$
16,622

 
$
214,364

 
$
230,986

Full documentation amortizing
39,032

 
8,217

 
42,983

 
90,232

 
4,312,373

 
4,402,605

Reduced documentation interest-only
2,974

 
779

 
11,624

 
15,377

 
84,184

 
99,561

Reduced documentation amortizing
28,526

 
6,214

 
35,351

 
70,091

 
562,120

 
632,211

Total residential
72,445

 
18,314

 
101,563

 
192,322

 
5,173,041

 
5,365,363

Multi-family
1,488

 
1,406

 
1,244

 
4,138

 
4,042,484

 
4,046,622

Commercial real estate
2,262

 
1,298

 

 
3,560

 
725,699

 
729,259

Total mortgage loans
76,195

 
21,018

 
102,807

 
200,020

 
9,941,224

 
10,141,244

Consumer and other loans (gross):
 

 
 

 
 

 
 

 
 

 
 

Home equity and other consumer
1,281

 
550

 
4,483

 
6,314

 
133,024

 
139,338

Commercial and industrial

 
647

 
42

 
689

 
99,087

 
99,776

Total consumer and other loans
1,281

 
1,197

 
4,525

 
7,003

 
232,111

 
239,114

Total loans
$
77,476

 
$
22,215

 
$
107,332

 
$
207,023

 
$
10,173,335

 
$
10,380,358

Net unamortized premiums and deferred loan
origination costs
 

 
 

 
 

 
 

 
 

 
36,829

Loans receivable
 

 
 

 
 

 
 

 
 

 
10,417,187

Allowance for loan losses
 

 
 

 
 

 
 

 
 

 
(86,100
)
Loans receivable, net
 

 
 

 
 

 
 

 
 

 
$
10,331,087



14


We segment our one-to-four family, or residential, mortgage loan portfolio by interest-only and amortizing loans, full documentation and reduced documentation loans, and origination time periods, and analyze our historical loss experience and delinquency levels and trends of these segments.  We analyze multi-family and commercial real estate mortgage loans by portfolio using predictive modeling techniques for loans originated after 2010 and by geographic location for loans originated prior to 2011. We analyze our consumer and other loan portfolio by home equity lines of credit, commercial and industrial loans and other consumer loans and perform similar historical loss analyses.

Our evaluation of loss experience factors considers trends in such factors over the prior three years, as well as an estimate of the average amount of time from an event signaling the potential inability of a borrower to continue to pay as agreed to the point at which a loss is confirmed, for substantially all of the loan portfolio, with the exception of multi-family and commercial real estate mortgage loans originated after 2010, for which our evaluation includes predictive modeling techniques. We also analyze our historical loss experience over 12, 15, 18 and 24 month periods.  The loss history used in calculating our quantitative allowance coverage percentages varies based on loan type. Also, for a particular loan type, we may not have sufficient loss history to develop a reasonable estimate of loss and in these instances we may consider our loss experience for other, similar loan types and may evaluate those losses over a longer period than two years.  Additionally, multi-family and commercial real estate loss experience may be adjusted based on the composition of the losses (loan sales, short sales and partial charge-offs). Modeling techniques utilize data inputs for each loan in the portfolio, including credit facility terms and performance to date, property details and borrower financial performance data. The model also incorporates real estate market data from an established real estate market database company to forecast future performance of the properties, and includes a loan loss predictive model based on studies of defaulted commercial real estate loans. The model then generates a probability of default, loss given default and ultimately an estimated loss for each loan quarterly over the remaining life of the loan. The appropriate timeframe from which to assign an estimated loss percentage to the pool of loans is assessed by management. We update our historical loss analyses, as well as our predictive model, quarterly and evaluate the need to modify our quantitative allowances as a result of our updated charge-off and loss analyses. We also consider qualitative factors with the purpose of assessing the adequacy of the overall allowance for loan losses as well as the allocation of the allowance for loan losses by loan category.

Allowance adequacy calculations are adjusted quarterly, based on the results of our quantitative and qualitative analyses, to reflect our current estimates of the amount of probable losses inherent in our loan portfolio. The portion of the allowance allocated to each loan category does not represent the total available to absorb losses which may occur within the loan category, since the total allowance for loan losses is available for losses applicable to the entire loan portfolio.


15


The following tables set forth the changes in our allowance for loan losses by loan receivable segment for the periods indicated.
 
 
For the Three Months Ended March 31, 2017
 
 
Mortgage Loans
 
 
Consumer and Other Loans
 
 

 
 
 
 
 
Multi-Family
 
Commercial Real Estate
 
 
 
(In Thousands)
Residential
 
 
 
 
Total
Balance at January 1, 2017
 
$
36,439

 
 
$
34,901

 
 
$
9,299

 
 
 
$
5,461

 
 
$
86,100

Provision credited to operations
 
(901
)
 
 
(957
)
 
 
(503
)
 
 
 
(125
)
 
 
(2,486
)
Charge-offs
 
(2,235
)
 
 
(34
)
 
 

 
 
 
(112
)
 
 
(2,381
)
Recoveries
 
1,048

 
 
39

 
 
109

 
 
 
71

 
 
1,267

Balance at March 31, 2017
 
$
34,351

 
 
$
33,949

 
 
$
8,905

 
 
 
$
5,295

 
 
$
82,500

 
 
For the Three Months Ended March 31, 2016
 
 
Mortgage Loans
 
 
Consumer and Other Loans
 
 

 
 
 
 
 
Multi-Family
 
Commercial Real Estate
 
 
 
(In Thousands)
Residential
 
 
 
 
Total
Balance at January 1, 2016
 
$
44,951

 
 
$
35,544

 
 
$
11,217

 
 
 
$
6,288

 
 
$
98,000

Provision charged (credited) to operations
 
138

 
 
(3,257
)
 
 
(849
)
 
 
 
841

 
 
(3,127
)
Charge-offs
 
(1,665
)
 
 
(310
)
 
 

 
 
 
(765
)
 
 
(2,740
)
Recoveries
 
954

 
 
1,043

 
 

 
 
 
70

 
 
2,067

Balance at March 31, 2016
 
$
44,378

 
 
$
33,020

 
 
$
10,368

 
 
 
$
6,434

 
 
$
94,200


The following table sets forth the balances of our residential interest-only mortgage loans at March 31, 2017 by the period in which such loans are scheduled to enter their amortization period.
(In Thousands)
Recorded
Investment
Amortization scheduled to begin in:
 

12 months or less (1)
$
206,063

13 to 24 months
24,107

25 to 36 months
10,314

Over 36 months
5,467

Total
$
245,951


(1)
Includes $14.4 million of past due loans that were scheduled to enter amortization prior to March 31, 2017.

Pursuant to federal regulations and our policy, loans considered to be of lesser quality are rated as special mention, substandard, doubtful or loss. A loan rated 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. A loan rated as substandard is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard loans include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Loans rated 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. Loans rated as loss are those considered uncollectable 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.


16


The following tables set forth the balances of our loan portfolio segments by credit quality indicator at the dates indicated.
 
At March 31, 2017
 
Mortgage Loans
 
Consumer and Other Loans
 
 
(In Thousands)
Residential
 
Multi-Family
 
Commercial Real Estate
 
Home Equity and Other Consumer
 
Commercial and Industrial
 
Total
Not criticized
$
5,019,425

 
 
$
3,984,135

 
 
 
$
673,838

 
 
 
$
130,219

 
 
 
$
89,075

 
 
$
9,896,692

Criticized:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Special mention
12,849

 
 
23,777

 
 
 
6,856

 
 
 
495

 
 
 
1,867

 
 
45,844

Substandard
182,496

 
 
15,852

 
 
 
20,181

 
 
 
4,139

 
 
 
32

 
 
222,700

Doubtful

 
 

 
 
 

 
 
 

 
 
 

 
 

Total
$
5,214,770

 
 
$
4,023,764

 
 
 
$
700,875

 
 
 
$
134,853

 
 
 
$
90,974

 
 
$
10,165,236

 
At December 31, 2016
 
Mortgage Loans
 
 
Consumer and Other Loans
 
 
(In Thousands)
Residential
 
Multi-Family
 
Commercial Real Estate
 
Home Equity and Other Consumer
 
Commercial and Industrial
 
Total
Not criticized
$
5,158,878

 
 
$
4,005,703

 
 
 
$
702,697

 
 
 
$
134,305

 
 
 
$
99,087

 
 
$
10,100,670

Criticized:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Special mention
14,922

 
 
24,804

 
 
 
9,235

 
 
 
550

 
 
 
647

 
 
50,158

Substandard
191,563

 
 
16,115

 
 
 
17,327

 
 
 
4,483

 
 
 
42

 
 
229,530

Doubtful

 
 

 
 
 

 
 
 

 
 
 

 
 

Total
$
5,365,363

 
 
$
4,046,622

 
 
 
$
729,259

 
 
 
$
139,338

 
 
 
$
99,776

 
 
$
10,380,358


The following tables set forth the balances of our loans receivable and the related allowance for loan loss allocation by segment and by the impairment methodology followed in determining the allowance for loan losses at the dates indicated.
 
At March 31, 2017
 
Mortgage Loans
 
 
Consumer and Other Loans
 
 

 
 
 
Multi-Family
 
Commercial Real Estate
 
 
 
(In Thousands)
Residential
 
 
 
 
Total
Loans:
 

 
 

 
 
 

 
 
 

 
 

Individually evaluated for impairment
$
190,955

 
$
6,059

 
 
$
11,429

 
 
$
3,928

 
$
212,371

Collectively evaluated for impairment
5,023,815

 
4,017,705

 
 
689,446

 
 
221,899

 
9,952,865

Total loans
$
5,214,770

 
$
4,023,764

 
 
$
700,875

 
 
$
225,827

 
$
10,165,236

Allowance for loan losses:
 

 
 

 
 
 

 
 
 

 
 

Individually evaluated for impairment
$
8,691

 
$
1

 
 
$
70

 
 
$
286

 
$
9,048

Collectively evaluated for impairment
25,660

 
33,948

 
 
8,835

 
 
5,009

 
73,452

Total allowance for loan losses
$
34,351

 
$
33,949

 
 
$
8,905

 
 
$
5,295

 
$
82,500


17


 
At December 31, 2016
 
Mortgage Loans
 
 
Consumer and Other Loans
 
 

 
 
 
Multi-Family
 
Commercial Real Estate
 
 
 
(In Thousands)
Residential
 
 
 
 
Total
Loans:
 

 
 

 
 
 

 
 
 

 
 

Individually evaluated for impairment
$
192,427

 
$
7,112

 
 
$
10,033

 
 
$
4,091

 
$
213,663

Collectively evaluated for impairment
5,172,936

 
4,039,510

 
 
719,226

 
 
235,023

 
10,166,695

Total loans
$
5,365,363

 
$
4,046,622

 
 
$
729,259

 
 
$
239,114

 
$
10,380,358

Allowance for loan losses:
 

 
 

 
 
 

 
 
 

 
 

Individually evaluated for impairment
$
9,044

 
$
24

 
 
$

 
 
$
310

 
$
9,378

Collectively evaluated for impairment
27,395

 
34,877

 
 
9,299

 
 
5,151

 
76,722

Total allowance for loan losses
$
36,439

 
$
34,901

 
 
$
9,299

 
 
$
5,461

 
$
86,100


The following table summarizes information related to our impaired loans by segment and class at the dates indicated.
 
At March 31, 2017
 
At December 31, 2016
(In Thousands)
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Net Investment
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Net Investment
With an allowance recorded:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Full documentation interest-only
$
17,600

 
$
13,753

 
$
(1,634
)
 
$
12,119

 
$
21,202

 
$
16,535

 
$
(1,863
)
 
$
14,672

Full documentation amortizing
89,948

 
81,243

 
(3,373
)
 
77,870

 
88,106

 
79,584

 
(3,494
)
 
76,090

Reduced documentation interest-only
18,646

 
15,673

 
(1,367
)
 
14,306

 
28,637

 
23,090

 
(1,589
)
 
21,501

Reduced documentation amortizing
88,981

 
77,591

 
(2,317
)
 
75,274

 
79,670

 
70,623

 
(2,098
)
 
68,525

Multi-family
1,449

 
1,449

 
(1
)
 
1,448

 
2,427

 
2,432

 
(24
)
 
2,408

Commercial real estate
2,266

 
2,266

 
(70
)
 
2,196

 

 

 

 

Consumer and other loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Home equity lines of credit
4,261

 
3,896

 
(286
)
 
3,610

 
4,414

 
4,049

 
(310
)
 
3,739

Without an allowance recorded:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reduced documentation amortizing
3,123

 
2,695

 

 
2,695

 
2,965

 
2,595

 

 
2,595

Multi-family
5,164

 
4,610

 

 
4,610

 
5,272

 
4,680

 

 
4,680

Commercial real estate
10,812

 
9,163

 

 
9,163

 
11,791

 
10,033

 

 
10,033

Consumer and other loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
80

 
32

 

 
32

 
90

 
42

 

 
42

Total impaired loans
$
242,330

 
$
212,371

 
$
(9,048
)
 
$
203,323

 
$
244,574

 
$
213,663

 
$
(9,378
)
 
$
204,285



18


The following table sets forth the average recorded investment, interest income recognized and cash basis interest income related to our impaired loans by segment and class for the periods indicated.
 
For the Three Months Ended March 31,
 
2017
 
2016
(In Thousands)
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Cash Basis
Interest
Income
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Cash Basis
Interest
Income
With an allowance recorded:
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans:
 

 
 

 
 

 
 

 
 

 
 

Residential:
 

 
 

 
 

 
 

 
 

 
 

Full documentation interest-only
$
15,144

 
$
153

 
$
156

 
$
29,462

 
$
189

 
$
186

Full documentation amortizing
80,414

 
624

 
614

 
64,858

 
494

 
478

Reduced documentation interest-only
19,382

 
111

 
103

 
43,118

 
391

 
385

Reduced documentation amortizing
74,107

 
757

 
738

 
57,203

 
525

 
529

Multi-family
1,941

 
26

 
26

 
6,813

 
67

 
79

Commercial real estate
1,133

 
34

 
30

 
3,875

 
6

 
7

Consumer and other loans:
 

 
 

 
 

 
 

 
 

 
 

Home equity lines of credit
3,973

 
13

 
13

 
4,753

 
5

 
9

Without an allowance recorded:
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans:
 

 
 

 
 

 
 

 
 

 
 

Residential:
 
 
 
 
 
 
 
 
 
 
 
Reduced documentation amortizing
2,645

 
23

 
21

 

 

 

Multi-family
4,645

 
51

 
55

 
13,375

 
152

 
149

Commercial real estate
9,598

 
128

 
129

 
10,206

 
166

 
171

Consumer and other loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
37

 
2

 
2

 

 

 

Total impaired loans
$
213,019

 
$
1,922

 
$
1,887

 
$
233,663

 
$
1,995

 
$
1,993


The following table sets forth information about our mortgage loans receivable by segment and class at March 31, 2017 and 2016 which were modified in a troubled debt restructuring, or TDR, during the periods indicated. Modifications in a TDR for the three months ended March 31, 2017 included interest rate modifications of $1.7 million. In addition, $884,000 of loans at March 31, 2017 were classified as TDRs as a result of relief granted under Chapter 7 bankruptcy filings.
 
Modifications During the Three Months Ended March 31,
 
2017
 
2016
(Dollars In Thousands)
Number
of Loans
 
Pre-
Modification
Recorded
Investment
 
Recorded Investment at March 31, 2017
 
Number
of Loans
 
Pre-
Modification
Recorded
Investment
 
Recorded Investment at March 31, 2016
Residential:
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
Full documentation interest-only
 
1

 
 
 
$
196

 
 
 
$
189

 
 
 
4

 
 
 
$
888

 
 
 
$
889

 
Full documentation amortizing
 
2

 
 
 
485

 
 
 
482

 
 
 
2

 
 
 
591

 
 
 
589

 
Reduced documentation interest-only
 
3

 
 
 
1,121

 
 
 
1,099

 
 
 
3

 
 
 
1,691

 
 
 
1,686

 
Reduced documentation amortizing
 
4

 
 
 
795

 
 
 
788

 
 
 
3

 
 
 
995

 
 
 
985

 
Total
 
10

 
 
 
$
2,597

 
 
 
$
2,558

 
 
 
12

 
 
 
$
4,165

 
 
 
$
4,149

 


19


The following table sets forth information about our mortgage loans receivable by segment and class at March 31, 2017 and 2016 which were modified in a TDR during the twelve month periods ended March 31, 2017 and 2016 and had a subsequent payment default during the periods indicated.
 
For the Three Months Ended March 31,
 
2017
 
2016
(Dollars In Thousands)
Number
of Loans
 
Recorded Investment at March 31, 2017
 
Number
of Loans
 
Recorded Investment at March 31, 2016
Residential:
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
Full documentation interest-only
 
3

 
 
 
$
1,078

 
 
 
2

 
 
 
$
533

 
Full documentation amortizing
 
4

 
 
 
1,566

 
 
 
2

 
 
 
408

 
Reduced documentation interest-only
 
2

 
 
 
1,063

 
 
 
4

 
 
 
1,947

 
Reduced documentation amortizing
 

 
 
 

 
 
 
1

 
 
 
288

 
Total
 
9

 
 
 
$
3,707

 
 
 
9

 
 
 
$
3,176

 

Included in loans receivable at March 31, 2017 are loans in the process of foreclosure collateralized by residential real estate property with a recorded investment of $75.0 million.

For additional information regarding our loans receivable and allowance for loan losses, see “Asset Quality” and “Critical Accounting Policies” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” or “MD&A.”


5.    Securities Sold Under Agreements to Repurchase

The following table details the remaining contractual maturities of our agreements to repurchase, or repo agreements, at March 31, 2017.
Year
 
Amount
 
 
 
(In Thousands)
 
2018
 
$
200,000

 
 
2019
 
600,000

 
 
2020
 
300,000

 
 
Total
 
$
1,100,000

 
(1)

(1)
Callable within the next three months and on a quarterly basis thereafter.

The outstanding repo agreements at March 31, 2017 were fixed rate and collateralized by GSE securities, of which 82% were residential mortgage-backed securities and 18% were obligations of GSEs. Securities collateralizing these agreements are classified as encumbered securities in the consolidated statements of financial condition. The amount of excess collateral required is governed by each individual contract. The primary risk associated with these secured borrowings is the requirement to pledge a market value based balance of collateral in excess of the borrowed amount. The excess collateral pledged represents an unsecured exposure to the lending counterparty. As the market value of the collateral changes, both through changes in discount rates and spreads as well as related cash flows, additional collateral may need to be pledged. In accordance with our policies, criteria for eligible counterparties has been established and excess collateral pledged is monitored to minimize our exposure.



20


6.    Earnings Per Common Share

The following table is a reconciliation of basic and diluted earnings per common share, or EPS.
 
For the Three Months Ended March 31,
(In Thousands, Except Share Data)
2017
 
2016
Net income
 
$
14,407
 
 
 
$
18,565
 
Preferred stock dividends
 
(2,194
)
 
 
(2,194
)
Net income available to common shareholders
 
12,213
 
 
 
16,371
 
Income allocated to participating securities
 
(80
)
 
 
(135
)
Net income allocated to common shareholders
 
$
12,133
 
 
 
$
16,236
 
 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
100,585,603
 
 
100,368,931
 
Dilutive effect of stock options and restricted stock units (1) (2)
 
 
 
Diluted weighted average common shares outstanding
100,585,603
 
 
100,368,931
 
 
 
 
 
 
 
 
 
Basic EPS
 
 
$
0.12

 
 
 
$
0.16

Diluted EPS
 
 
$
0.12

 
 
 
$
0.16


(1)
Excludes options to purchase 933 shares of common stock which were outstanding during the three months ended March 31, 2017 and options to purchase 6,989 shares of common stock which were outstanding during the three months ended March 31, 2016 because their inclusion would be anti-dilutive.
(2)
Excludes 490,387 unvested restricted stock units which were outstanding during the three months ended March 31, 2017 and 747,132 unvested restricted stock units which were outstanding during the three months ended March 31, 2016 because the performance conditions have not been satisfied.


7.    Other Comprehensive Income/Loss

The following tables set forth the components of accumulated other comprehensive loss, net of related tax effects, at the dates indicated and the changes during the three months ended March 31, 2017 and 2016.
(In Thousands)
At  
 December 31, 2016
 
Other
Comprehensive
(Loss) Income
 
At 
 March 31, 2017
Net unrealized gain on securities available-for-sale
 
$
2,261

 
 
 
$
(432
)
 
 
 
$
1,829

 
Net actuarial loss on pension plans and other postretirement benefits
 
(56,207
)
 
 
 
371

 
 
 
(55,836
)
 
Prior service cost on pension plans and other postretirement benefits
 
(2,935
)
 
 
 
29

 
 
 
(2,906
)
 
Accumulated other comprehensive loss
 
$
(56,881
)
 
 
 
$
(32
)
 
 
 
$
(56,913
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(In Thousands)
At  
 December 31, 2015
 
Other
Comprehensive
Income
 
At 
 March 31, 2016
Net unrealized gain on securities available-for-sale
 
$
2,827

 
 
 
$
3,985

 
 
 
$
6,812

 
Net actuarial loss on pension plans and other postretirement benefits
 
(58,396
)
 
 
 
397

 
 
 
(57,999
)
 
Prior service cost on pension plans and other postretirement benefits
 
(3,048
)
 
 
 
28

 
 
 
(3,020
)
 
Accumulated other comprehensive loss
 
$
(58,617
)
 
 
 
$
4,410

 
 
 
$
(54,207
)
 
 
 
 
 
 
 
 
 
 
 
 
 


21


The following tables set forth the components of other comprehensive income/loss for the periods indicated.
 
 
For the Three Months Ended 
 March 31, 2017
 
(In Thousands)
Before Tax
Amount
 
Income Tax
Benefit
(Expense)
 
After Tax
Amount
Net unrealized holding loss on securities available-for-sale arising during the period
 
$
(724
)
 
 
 
$
292

 
 
 
$
(432
)
 
Reclassification adjustment for net actuarial loss on pension plans and other postretirement benefits included in net income
 
623

 
 
 
(252
)
 
 
 
371

 
Reclassification adjustment for prior service cost on pension plans and other postretirement benefits included in net income
 
48

 
 
 
(19
)
 
 
 
29

 
Other comprehensive loss
 
$
(53
)
 
 
 
$
21

 
 
 
$
(32
)
 
 
 
For the Three Months Ended 
 March 31, 2016
 
(In Thousands)
Before Tax
Amount
 
Income Tax
(Expense)
Benefit
 
After Tax
Amount
Net unrealized gain on securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding gain on securities arising during the period
 
$
6,774

 
 
 
$
(2,738
)
 
 
 
$
4,036

 
Reclassification adjustment for gain on sales of securities included in net income
 
(86
)
 
 
 
35

 
 
 
(51
)
 
Net unrealized gain on securities available-for-sale
 
6,688

 
 
 
(2,703
)
 
 
 
3,985

 
Reclassification adjustment for net actuarial loss on pension plans and other postretirement benefits included in net income
 
667

 
 
 
(270
)
 
 
 
397

 
Reclassification adjustment for prior service cost on pension plans and other postretirement benefits included in net income
 
47

 
 
 
(19
)
 
 
 
28

 
Other comprehensive income
 
$
7,402

 
 
 
$
(2,992
)
 
 
 
$
4,410

 

The following table sets forth information about amounts reclassified from accumulated other comprehensive loss to, and the affected line items in, the consolidated statements of income for the periods indicated.
 
For the Three Months Ended March 31,
 
Income Statement
Line Item
(In Thousands)
 
2017
 
 
 
2016
 
 
Reclassification adjustment for gain on sales of securities
 
$

 
 
 
$
86

 
 
Gain on sales of securities
Reclassification adjustment for net actuarial loss (1)
 
(623
)
 
 
 
(667
)
 
 
Compensation and benefits
Reclassification adjustment for prior service cost (1)
 
(48
)
 
 
 
(47
)
 
 
Compensation and benefits
Total reclassifications, before tax
 
(671
)
 
 
 
(628
)
 
 
 
Income tax effect
 
271

 
 
 
254

 
 
Income tax expense
Total reclassifications, net of tax
 
$
(400
)
 
 
 
$
(374
)
 
 
Net income

(1)
These other comprehensive income/loss components are included in the computations of net periodic cost/benefit for our defined benefit pension plans and other postretirement benefit plan. See Note 8 for additional details.



22


8.    Pension Plans and Other Postretirement Benefits

The following table sets forth information regarding the components of net periodic cost for our defined benefit pension plans and other postretirement benefit plan for the periods indicated.
 
 
Pension Benefits
 
 
 
Other Postretirement
Benefits
 
 
For the Three Months Ended March 31,
 
For the Three Months Ended March 31,
(In Thousands)
 
2017
 
 
 
2016
 
 
 
2017
 
 
 
2016
 
Service cost
 
$

 
 
 
$

 
 
 
$
490

 
 
 
$
472

 
Interest cost
 
2,430

 
 
 
2,536

 
 
 
255

 
 
 
263

 
Expected return on plan assets
 
(3,097
)
 
 
 
(3,058
)
 
 
 

 
 
 

 
Recognized net actuarial loss (gain)
 
722

 
 
 
734

 
 
 
(99
)
 
 
 
(67
)
 
Amortization of prior service cost
 
48

 
 
 
47

 
 
 

 
 
 

 
Settlement
 
61

 
 
 

 
 
 

 
 
 

 
Net periodic cost
 
$
164

 
 
 
$
259

 
 
 
$
646

 
 
 
$
668

 


9.    Stock Incentive Plans

During the three months ended March 31, 2017, 504,252 shares of restricted common stock were granted to select officers under the 2014 Amended and Restated Stock Incentive Plan for Officers and Employees of Astoria Financial Corporation, or the 2014 Employee Stock Plan, all of which remain outstanding at March 31, 2017 and vest one-third per year beginning in December 2017.  In the event the grantee terminates his/her employment due to death or disability, or in the event we experience a change in control, as defined and specified in the 2014 Employee Stock Plan, all restricted common stock granted pursuant to such plan immediately vests.

During the three months ended March 31, 2017, 17,532 shares of restricted common stock were granted to directors under the Astoria Financial Corporation 2007 Non-Employee Directors Stock Plan, as amended, all of which remain outstanding at March 31, 2017 and vest 100% in January 2020, although awards immediately vest upon death, disability, mandatory retirement, involuntary termination or a change in control, as such terms are defined in the plan.

The following table summarizes restricted common stock and performance-based restricted stock unit activity in our stock incentive plans for the three months ended March 31, 2017.
 
Restricted Common Stock
 
Restricted Stock Units
 
Number of Shares
 
Weighted Average
Grant Date Fair Value
 
Number of
Units
 
Weighted Average
Grant Date Fair Value
Unvested at January 1, 2017
 
639,329

 
 
 
$
14.40

 
 
 
705,600

 
 
 
$
12.41

 
Granted
 
521,784

 
 
 
19.80

 
 
 

 
 
 

 
Vested
 
(21,790
)
 
 
 
(12.62
)
 
 
 

 
 
 

 
Forfeited
 
(2,910
)
 
 
 
(14.85
)
 
 
 
(1,000
)
 
 
 
(12.64
)
 
Expired
 

 
 
 

 
 
 
(327,800
)
 
 
(1)
(12.14
)
 
Unvested at March 31, 2017
 
1,136,413

 
 
 
16.91

 
 
 
376,800

 
 
 
12.64

 

(1)
Expired on February 1, 2017. Performance-based conditions were not achieved.

23



Stock-based compensation expense is recognized on a straight-line basis over the vesting period and totaled $1.0 million, net of taxes of $697,000, for the three months ended March 31, 2017 and $942,000, net of taxes of $639,000, for the three months ended March 31, 2016. At March 31, 2017, pre-tax compensation cost related to all unvested awards of restricted common stock and restricted stock units not yet recognized totaled $17.4 million and will be recognized over a weighted average period of approximately 2.2 years, which excludes $2.4 million of pre-tax compensation cost related to 188,400 performance-based restricted stock units granted in 2015, for which compensation cost will begin to be recognized when the achievement of the performance conditions becomes probable.


10.    Investments in Affordable Housing Limited Partnerships

As part of our community reinvestment initiatives, we invest in affordable housing limited partnerships that make equity investments in multi-family affordable housing properties. We receive affordable housing tax credits and other tax benefits for these investments.

Our investment in affordable housing limited partnerships, reflected in other assets in the consolidated statements of financial condition, totaled $15.1 million at March 31, 2017 and $15.7 million at December 31, 2016. Our funding obligation related to such investments, reflected in other liabilities in the consolidated statements of financial condition, totaled $12.0 million at March 31, 2017 and December 31, 2016. Funding installments are due on an "as needed" basis, currently projected over the next two years, the timing of which cannot be estimated.

Expense related to our investments in affordable housing limited partnerships totaled $653,000 for the three months ended March 31, 2017, which was included in income tax expense in the consolidated statements of income. Such expense totaled $352,000 for the three months ended March 31, 2016, which was included in other non-interest expense in the consolidated statements of income. Affordable housing tax credits and other tax benefits recognized as a component of income tax expense in the consolidated statements of income totaled $590,000 for the three months ended March 31, 2017 and $390,000 for the three months ended March 31, 2016.


11.    Regulatory Matters

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Reform Act, in July 2013, the federal bank regulatory agencies, or 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 addition, the Final Capital Rules 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 phased in over three years and applied to the Common equity tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the Total risk-based capital ratio. Accordingly, 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%.


24


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 impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum Conservation Buffer is not met.

At March 31, 2017, the capital levels of both Astoria Financial Corporation and Astoria Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. The capital levels of both Astoria Financial Corporation and Astoria Bank at March 31, 2017 also exceeded the minimum capital requirements shown in the table below including the currently applicable Conservation Buffer of 1.25%. The following table sets forth information regarding the regulatory capital requirements applicable to Astoria Financial Corporation and Astoria Bank.
 
At March 31, 2017
 
Actual
 
Minimum
Capital Requirements
 
Minimum Capital
Requirements with
Conservation Buffer
 
To be Well Capitalized
Under Prompt
Corrective Action
Provisions
(Dollars in Thousands)
Amount
 
Ratio
 
 
Amount
 
 
Ratio
 
 
Amount
 
 
Ratio
 
 
Amount
 
 
Ratio
Astoria Financial Corporation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage
$
1,583,061

 
11.12
%
 
 
$
569,684

 
 
4.00
%
 
 
N/A
 
 
N/A
 
 
$
712,105

 
 
5.00
%
Common equity
tier 1 risk-based
1,455,879

 
18.02

 
 
363,516

 
 
4.50

 
 
$
464,492

 
 
5.75
%
 
 
525,078

 
 
6.50

Tier 1 risk-based
1,583,061

 
19.60

 
 
484,688

 
 
6.00

 
 
585,664

 
 
7.25

 
 
646,250

 
 
8.00

Total risk-based
1,665,994

 
20.62

 
 
646,250

 
 
8.00

 
 
747,227

 
 
9.25

 
 
807,813

 
 
10.00

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Astoria Bank:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage
$
1,762,569

 
12.44
%
 
 
$
566,931

 
 
4.00
%
 
 
N/A
 
 
N/A
 
 
$
708,664

 
 
5.00
%
Common equity
tier 1 risk-based
1,762,569

 
21.86

 
 
362,844

 
 
4.50

 
 
$
463,634

 
 
5.75
%
 
 
524,108

 
 
6.50

Tier 1 risk-based
1,762,569

 
21.86

 
 
483,792

 
 
6.00

 
 
584,582

 
 
7.25

 
 
645,056

 
 
8.00

Total risk-based
1,845,502

 
22.89

 
 
645,056

 
 
8.00

 
 
745,846

 
 
9.25

 
 
806,320

 
 
10.00



25


 
At December 31, 2016
 
Actual
 
Minimum
Capital Requirements
 
Minimum Capital
Requirements with
Conservation Buffer
 
To be Well Capitalized
Under Prompt
Corrective Action
Provisions
(Dollars in Thousands)
Amount
 
Ratio
 
 
Amount
 
 
Ratio
 
 
Amount
 
 
Ratio
 
 
Amount
 
 
Ratio
Astoria Financial Corporation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage
$
1,572,750

 
10.85
%
 
 
$
579,829

 
 
4.00
%
 
 
N/A
 
 
N/A
 
 
$
724,786

 
 
5.00
%
Common equity
tier 1 risk-based
1,448,341

 
17.29

 
 
376,857

 
 
4.50

 
 
$
429,199

 
 
5.125
%
 
 
544,350

 
 
6.50

Tier 1 risk-based
1,572,750

 
18.78

 
 
502,477

 
 
6.00

 
 
554,818

 
 
6.625

 
 
669,969

 
 
8.00

Total risk-based
1,659,221

 
19.81

 
 
669,969

 
 
8.00

 
 
722,310

 
 
8.625

 
 
837,461

 
 
10.00

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Astoria Bank:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage
$
1,742,580

 
12.09
%
 
 
$
576,660

 
 
4.00
%
 
 
N/A
 
 
N/A
 
 
$
720,825

 
 
5.00
%
Common equity
tier 1 risk-based
1,742,580

 
20.85

 
 
376,129

 
 
4.50

 
 
$
428,369

 
 
5.125
%
 
 
543,297

 
 
6.50

Tier 1 risk-based
1,742,580

 
20.85

 
 
501,505

 
 
6.00

 
 
553,745

 
 
6.625

 
 
668,673

 
 
8.00

Total risk-based
1,829,051

 
21.88

 
 
668,673

 
 
8.00

 
 
720,913

 
 
8.625

 
 
835,841

 
 
10.00



12.    Fair Value Measurements

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. We group our assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value.  These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

We base our fair values on the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, with additional considerations when the volume and level of activity for an asset or liability have significantly decreased and on identifying circumstances that indicate a transaction is not orderly.  We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.


26


Recurring Fair Value Measurements

Our securities available-for-sale portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity.  Additionally, in connection with our mortgage banking activities we have commitments to fund loans held-for-sale and commitments to sell loans, which are considered free-standing derivative financial instruments, the fair values of which are not material to our financial condition or results of operations.

The following tables set forth the carrying values of our assets measured at estimated fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at the dates indicated.
 
Carrying Value at March 31, 2017
(In Thousands)
Total
 
Level 1
 
Level 2
Securities available-for-sale:
 

 
 

 
 

Residential mortgage-backed securities:
 

 
 

 
 

GSE issuance REMICs and CMOs
$
227,292

 
$

 
$
227,292

Non-GSE issuance REMICs and CMOs
1,136

 

 
1,136

GSE pass-through certificates
8,576

 

 
8,576

Obligations of GSEs
28,893

 

 
28,893

Fannie Mae stock
2

 
2

 

Total securities available-for-sale
$
265,899

 
$
2

 
$
265,897

 
 
 
 
 
 
 
Carrying Value at December 31, 2016
(In Thousands)
Total
 
Level 1
 
Level 2
Securities available-for-sale:
 

 
 

 
 

Residential mortgage-backed securities:
 

 
 

 
 

GSE issuance REMICs and CMOs
$
240,793

 
$

 
$
240,793

Non-GSE issuance REMICs and CMOs
1,443

 

 
1,443

GSE pass-through certificates
8,930

 

 
8,930

Obligations of GSEs
28,875

 

 
28,875

Fannie Mae stock
4

 
4

 

Total securities available-for-sale
$
280,045

 
$
4

 
$
280,041


The following is a description of valuation methodologies used for assets measured at fair value on a recurring basis.

Residential mortgage-backed securities
Residential mortgage-backed securities comprised 89% of our securities available-for-sale portfolio at March 31, 2017 and 90% at December 31, 2016.  The fair values for these securities are obtained from an independent nationally recognized pricing service.  Our pricing service uses various modeling techniques to determine pricing for our mortgage-backed securities, including options based pricing and discounted cash flow models.  The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, reference data, monthly payment information and collateral performance.  GSE securities, for which an active market exists for similar securities making observable inputs readily available, comprised 100% of our available-for-sale residential mortgage-backed securities portfolio at March 31, 2017 and 99% at December 31, 2016.

27



We review changes in the pricing service fair values from month to month taking into consideration changes in market conditions including changes in mortgage spreads, changes in treasury yields and changes in pricing on 15 and 30 year pass-through mortgage-backed securities.  Significant month over month price changes are analyzed further using discounted cash flow models and third party quotes.  Based upon our review of the prices provided by our pricing service, the estimated fair values incorporate observable market inputs commonly used by buyers and sellers of these types of securities at the measurement date in orderly transactions between market participants, and, as such, are classified as Level 2.

Obligations of GSEs
Obligations of GSEs comprised 11% of our securities available-for-sale portfolio at March 31, 2017 and 10% at December 31, 2016 and consisted of debt securities issued by GSEs.  The fair values for these securities are obtained from an independent nationally recognized pricing service.  Our pricing service gathers information from market sources and integrates relative credit information, observed market movements and sector news into their pricing applications and models. Spread scales, representing credit risk, are created and are based on the new issue market, secondary trading and dealer quotes.  Option adjusted spread, or OAS, models are incorporated to adjust spreads of issues that have early redemption features. Based upon our review of the prices provided by our pricing service, the estimated fair values incorporate observable market inputs commonly used by buyers and sellers of these types of securities at the measurement date in orderly transactions between market participants, and, as such, are classified as Level 2.

Fannie Mae stock
The fair value of the Fannie Mae stock in our available-for-sale securities portfolio is obtained from quoted market prices for identical instruments in active markets and, as such, is classified as Level 1.

Non-Recurring Fair Value Measurements

From time to time, we may be required to record at fair value assets or liabilities on a non-recurring basis, such as mortgage servicing rights, or MSR, loans receivable, certain loans held-for-sale and real estate owned, or REO.  These non-recurring fair value adjustments involve the application of lower of cost or market accounting or impairment write-downs of individual assets.

The following table sets forth the carrying values of those of our assets which were measured at fair value on a non-recurring basis at the dates indicated.  The fair value measurements for all of these assets fall within Level 3 of the fair value hierarchy.
 
 
Carrying Value
 
(In Thousands)
At March 31, 2017
 
At December 31, 2016
Non-performing loans held-for-sale, net
 
$
141

 
 
 
$
143

 
Impaired loans
 
124,766

 
 
 
124,101

 
MSR, net
 
10,237

 
 
 
10,130

 
REO, net
 
13,500

 
 
 
14,428

 
Total
 
$
148,644

 
 
 
$
148,802

 


28


The following table provides information regarding the gains (losses) recognized on our assets measured at fair value on a non-recurring basis for the periods indicated.
 
For the Three Months Ended March 31,
(In Thousands)
 
2017
 
 
 
2016
 
Non-performing loans held-for-sale, net (1)
 
$

 
 
 
$

 
Impaired loans (2)
 
(1,704
)
 
 
 
(1,858
)
 
MSR, net (3)
 
215

 
 
 
(877
)
 
REO, net (4)
 
(623
)
 
 
 
(250
)
 
Total
 
$
(2,112
)
 
 
 
$
(2,985
)
 

(1)
Losses are charged against the allowance for loan losses in the case of a write-down upon the transfer of a loan to held-for-sale. Losses subsequent to the transfer of a loan to held-for-sale are charged to other non-interest income.
(2)
Losses are charged against the allowance for loan losses.
(3)
Gains (losses) are credited/charged to mortgage banking income, net.
(4)
Upon the transfer of a loan to REO, losses are charged to the allowance for loan losses and gains are credited to the allowance for loan losses, to the extent of prior period loan charge-offs taken, or credited to fair value gain which is a component of other non-interest income.  Losses subsequent to the transfer of a loan to REO are charged to REO expense which is a component of other non-interest expense.

The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis.

Loans held-for-sale, net (non-performing loans held-for-sale)
Fair values of non-performing loans held-for-sale are estimated through either preliminary bids from potential purchasers of the loans or the estimated fair value of the underlying collateral discounted for factors necessary to solicit acceptable bids, and adjusted as necessary based on management’s experience with sales of similar types of loans and, as such, are classified as Level 3.  At March 31, 2017 and December 31, 2016, we held- for-sale one non-performing multi-family mortgage loan.

Loans receivable, net (impaired loans)
Loans which meet certain criteria are evaluated individually for impairment. A loan is considered impaired when, based upon current information and events, it is probable that we will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement.  Impaired loans were comprised of 90% residential mortgage loans, 8% multi-family and commercial real estate mortgage loans and 2% home equity lines of credit at March 31, 2017 and December 31, 2016.  Impaired loans for which a fair value adjustment was recognized were comprised of 91% residential mortgage loans, 8% multi-family and commercial real estate mortgage loans and 1% home equity lines of credit at March 31, 2017 and 90% residential mortgage loans, 9% multi-family and commercial real estate mortgage loans and 1% home equity lines of credit at December 31, 2016.  Our impaired loans are generally collateral dependent and, as such, are generally carried at the estimated fair value of the underlying collateral less estimated selling costs.

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 value 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-performing multi-family and commercial real estate mortgage loans when the loans initially become non-performing and annually thereafter and multi-family and commercial

29


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. Adjustments to final appraised values obtained from independent third party appraisers and automated valuation models are not made.  The fair values of impaired loans are based upon unobservable inputs and may not be realized in an actual sale or immediate settlement of the loan and, as such, are classified as Level 3.

MSR, net
The right to service loans for others is generally obtained through the sale of residential mortgage loans with servicing retained.  MSR are carried at the lower of cost or estimated fair value.  The estimated fair value of MSR is obtained through independent third party valuations through an analysis of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements and, as such, are classified as Level 3.  At March 31, 2017, our MSR were valued based on expected future cash flows considering a weighted average discount rate of 9.93%, a weighted average constant prepayment rate on mortgages of 10.24% and a weighted average life of 6.1 years.  At December 31, 2016, our MSR were valued based on expected future cash flows considering a weighted average discount rate of 9.94%, a weighted average constant prepayment rate on mortgages of 10.63% and a weighted average life of 6.0 years.  Management reviews the assumptions used to estimate the fair value of MSR to ensure they reflect current and anticipated market conditions.

REO, net
REO represents real estate acquired through foreclosure or by deed in lieu of foreclosure. All of our REO consisted of residential properties at March 31, 2017 and December 31, 2016. REO 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. The fair value of REO 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 and, as such, are classified as Level 3.

Fair Value of Financial Instruments

Quoted market prices available in formal trading marketplaces are typically the best evidence of the fair value of financial instruments.  In many cases, financial instruments we hold are not bought or sold in formal trading marketplaces.  Accordingly, fair values are derived or estimated based on a variety of valuation techniques in the absence of quoted market prices.  Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument.  These estimates do not reflect any possible tax ramifications, estimated transaction costs, or any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument.  Because no market exists for a certain portion of our financial instruments, fair value estimates are based on judgments regarding future loss experience, current economic conditions, risk characteristics and other such factors.  These estimates are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.  For these reasons and others, the estimated fair value disclosures presented herein do not represent our entire underlying value.  As such, readers are cautioned in

30


using this information for purposes of evaluating our financial condition and/or value either alone or in comparison with any other company.

The following tables set forth the carrying values and estimated fair values of our financial instruments which are carried in the consolidated statements of financial condition at either cost or at lower of cost or fair value in accordance with GAAP, and are not measured or recorded at fair value on a recurring basis, and the level within the fair value hierarchy in which the fair value measurements fall at the dates indicated.
 
At March 31, 2017
 
Carrying Value
 
Estimated Fair Value
(In Thousands)
 
Total
 
Level 2
 
Level 3
Financial Assets:
 

 
 

 
 

 
 

Securities held-to-maturity
$
2,769,376

 
$
2,721,723

 
$
2,721,723

 
$

FHLB-NY stock
107,166

 
107,166

 
107,166

 

Loans held-for-sale, net (1)
6,236

 
6,360

 

 
6,360

Loans receivable, net (1)
10,118,466

 
10,097,856

 

 
10,097,856

MSR, net (1)
10,237

 
10,240

 

 
10,240

Financial Liabilities:
 

 
 

 
 

 
 

Deposits
8,990,247

 
8,998,724

 
8,998,724

 

Borrowings, net
3,244,885

 
3,339,515

 
3,339,515

 

 
At December 31, 2016
 
Carrying Value
 
Estimated Fair Value
(In Thousands)
 
Total
 
Level 2
 
Level 3
Financial Assets:
 

 
 

 
 

 
 

Securities held-to-maturity
$
2,740,132

 
$
2,690,546

 
$
2,690,546

 
$

FHLB-NY stock
124,807

 
124,807

 
124,807

 

Loans held-for-sale, net (1)
11,584

 
11,589

 

 
11,589

Loans receivable, net (1)
10,331,087

 
10,318,246

 

 
10,318,246

MSR, net (1)
10,130

 
10,133

 

 
10,133

Financial Liabilities:
 

 
 

 
 

 
 

Deposits
8,877,055

 
8,887,745

 
8,887,745

 

Borrowings, net
3,634,752

 
3,747,657

 
3,747,657

 

_______________________________________________________
(1)
Includes assets measured at fair value on a non-recurring basis.

The following is a description of the methods and assumptions used to estimate fair values of our financial instruments which are not measured or recorded at fair value on a recurring or non-recurring basis.

Securities held-to-maturity
The fair values for substantially all of our securities held-to-maturity are obtained from an independent nationally recognized pricing service using similar methods and assumptions as used for our securities available-for-sale which are measured at fair value on a recurring basis.

Federal Home Loan Bank of New York, or FHLB-NY, stock
The fair value of FHLB-NY stock is based on redemption at par value.


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Loans held-for-sale, net
Included in loans held-for-sale, net, are 15 and 30 year fixed rate residential mortgage loans originated for sale that conform to GSE guidelines (conforming loans) for which fair values are estimated using market reference rates and spreads, credit spread adjustments, discounted cash flow analysis, benchmark pricing and option based pricing, as appropriate.

Loans receivable, net
Fair values of loans are estimated using market reference rates and spreads, credit spread adjustments, discounted cash flow analysis, benchmark pricing and option based pricing, as appropriate.

This technique of estimating fair value is extremely sensitive to the assumptions and estimates used.  While we have attempted to use assumptions and estimates which are the most reflective of the loan portfolio and the current market, a greater degree of subjectivity is inherent in determining these fair values than for fair values obtained from formal trading marketplaces.  In addition, our valuation method for loans, which is consistent with accounting guidance, does not fully incorporate an exit price approach to fair value.

Deposits
The fair values of deposits with no stated maturity, such as NOW and demand deposit (checking), money market and savings accounts, are equal to the amount payable on demand.  The fair values of certificates of deposit are based on discounted contractual cash flows using the weighted average remaining life of the portfolio discounted by the corresponding swap curve.

Borrowings, net
The fair values of borrowings are based upon an industry standard OAS model. This OAS model is calibrated to available counter party dealers' market quotes, as necessary.

Outstanding commitments
Outstanding commitments include commitments to extend credit and unadvanced lines of credit for which fair values were estimated based on an analysis of the interest rates and fees currently charged to enter into similar transactions.  The fair values of these commitments are immaterial to our financial condition.


13.    Litigation

In the ordinary course of our business, we are routinely made a defendant in or a party to pending or threatened legal actions or proceedings which, in some cases, seek substantial monetary damages from or other forms of relief against us.  In our opinion, after consultation with legal counsel, we believe it unlikely that such actions or proceedings will have a material adverse effect on our financial condition, results of operations or liquidity.

New York Community Bancorp, Inc. Merger-related Litigation
Following the announcement of the execution of the Agreement and Plan of Merger with New York Community Bancorp, Inc., or NYCB, on October 28, 2015, referred to as the NYCB Merger Agreement, six lawsuits challenging the proposed merger with NYCB, or the NYCB Merger, were filed in the Supreme Court of the State of New York, County of Nassau. These actions were captioned: (1) Sandra E. Weiss IRA v. Chrin, et al., Index No. 607132/2015 (filed November 4, 2015); (2) Raul v. Palleschi, et al., Index No. 607238/2015 (filed November 6, 2015); (3) Lowinger v. Redman, et al., Index No. 607268/2015 (filed November 9, 2015); (4) Minzer v. Astoria Fin. Corp., et al., Index No. 607358/2015 (filed November 12, 2015); (5) MSS 12-09 Trust v. Palleschi, et al., Index No. 607472/2015 (filed November 13, 2015); and (6)

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The Firemen’s Retirement System of St. Louis v. Keegan, et al., Index No. 607612/2015 (filed November 23, 2015). On January 15, 2016, the court consolidated the New York lawsuits under the caption In re Astoria Financial Corporation Shareholders Litigation, Index No. 607132/2015. Each of the lawsuits was a putative class action filed on behalf of the stockholders of Astoria and named as defendants Astoria, its directors and NYCB, or collectively, the defendants. The NYCB Merger Agreement was terminated effective January 1, 2017.

On February 23, 2017, in light of the termination of the NYCB Merger Agreement, the defendants and the plaintiffs agreed to voluntarily discontinue the consolidated lawsuits without prejudice and without any costs to any party. For additional information regarding the NYCB Merger-related litigation, see Part I, Item 3, “Legal Proceedings,” in our 2016 Annual Report on Form 10-K.

Sterling Merger-related Litigation
Following the announcement of the execution of the Sterling Merger Agreement, a number of lawsuits challenging the proposed Sterling Merger were filed: (1) MSS 1209 Trust v. Astoria Financial Corporation, et al, Index No. 602161/2017, filed March 13, 2017 in the Supreme Court of the State of New York, County of Nassau, or the MSS Complaint; (2) Parshall v. Astoria Financial Corporation, et al, Case No. 2:17-cv-02165, filed April 10, 2017 in the United States District Court for the Eastern District of New York, or the Parshall Complaint; (3) Minzer v. Astoria Financial Corporation, et al., Case No. 2017-0284, filed April 12, 2017 in the Court of Chancery of the State of Delaware, or the Minzer Complaint; (4) O’Connell v. Astoria Financial Corporation, et al., Index No. 603703/2017, filed April 28, 2017 in the Supreme Court of the State of New York, County of Nassau, or the O’Connell Complaint, and together with the MSS Complaint and the Minzer Complaint, the State Court Complaints; and (5) Jenkins v. Astoria Financial Corporation, et al., filed May 2, 2017 in the United States District Court for the Eastern District of New York, or the Jenkins Complaint, and together with the Parshall Complaint, the Federal Complaints. Each of these lawsuits is a putative class action filed on behalf of stockholders of Astoria and names as defendants Astoria, its directors and Sterling.

The State Court Complaints generally allege that the directors of Astoria breached their fiduciary duties in connection with their approval of the Sterling Merger Agreement because they failed to properly value Astoria and to take steps to maximize value to Astoria’s public stockholders, resulting in inadequate merger consideration. The State Court Complaints further variously allege that the directors of Astoria approved the Sterling Merger through a flawed sales process, alleging the absence of a competitive sales process and that the process was tainted by certain alleged conflicts of interest on the part of the Astoria directors. The State Court Complaints also allege that the directors of Astoria breached their fiduciary duties because they agreed to unreasonable deal protection devices that allegedly preclude other bidders from making a successful competing offer for Astoria, including, among others, a no solicitation provision that allegedly prevents other buyers from participating in discussions which may lead to a superior proposal, a recurring and unlimited information rights provision, which allegedly gives Astoria 24 hours to provide Sterling unfettered access to confidential, non-public information about competing proposals from third parties, and a provision that requires Astoria to pay Sterling a termination fee of $75.7 million under certain circumstances. The State Court Complaints further allege that Sterling aided and abetted the alleged fiduciary breaches by the Astoria Board of Directors.

The Federal Complaints variously allege that the defendants violated federal securities laws by disseminating a registration statement that omits material information with respect to the Sterling Merger, including because it allegedly omits material information regarding Astoria’s and Sterling’s financial projections and financial analyses performed by their respective financial advisors, as well as material information regarding the

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process leading to the proposed Sterling Merger. The O’Connell Complaint and the Minzer Complaint also allege that the registration statement is materially misleading.

Plaintiffs in the state and federal actions seek, among other things, an order enjoining completion of the proposed Sterling Merger, additional disclosure, rescission of the transaction or rescissory damages if the Sterling Merger is consummated, and an award of costs and attorneys’ fees.

In addition, on April 26, 2017, a lawsuit challenging the proposed Sterling Merger was filed in the Supreme Court of the State of New York, County of Rockland, Garfield v. Sterling Bancorp, et al, Index No. 031888/2017. This lawsuit is also a putative class action, but was brought on behalf of the stockholders of Sterling and names Sterling, its directors, and Astoria as defendants. The complaint alleges, among other things, that Astoria has aided and abetted a breach of the Sterling directors’ fiduciary duty of candor by jointly filing a materially deficient and misleading proxy statement. The complaint states that plaintiffs are seeking an order, requiring, among other things, the defendants to cause Sterling to make corrective and complete disclosures on the proxy statement, or enjoinment and unwinding of the proposed Sterling Merger Agreement if they do not, and an award of rescissory and other damages to plaintiffs, including attorneys’ fees and costs.

The defendants believe these actions are without merit. Accordingly, no liability or reserve has been recognized in our consolidated statement of financial condition at March 31, 2017 with respect to these matters.

Other potential plaintiffs may file additional lawsuits challenging the proposed Sterling Merger. The outcome of the pending and any additional future litigation is uncertain. If the cases are not resolved, these lawsuits could result in substantial costs to Astoria, including any costs associated with the indemnification of Astoria’s directors and officers. No assurance can be given at this time that the litigation against us will be resolved in our favor, that this litigation will not be costly to defend, that this litigation will not have an impact on our financial condition or results of operations or that, ultimately, any such impact will not be material.


14.    Impact of Recent Accounting Standards and Interpretations

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, “Revenue from Contracts with Customers (Topic 606),” to replace all current U.S. GAAP guidance on this topic and eliminate industry-specific guidance, providing a unified model to determine when and how revenue is recognized. We will adopt this guidance in the first quarter of 2018 using the modified retrospective method with a cumulative-effect adjustment to opening retained earnings, as appropriate. Our revenue is comprised of net interest income on financial assets and financial liabilities and non-interest income. The scope of ASU 2014-09 explicitly excludes net interest income as well as other revenues associated with financial assets and liabilities, including loans, leases, securities and derivatives. Accordingly, the majority of our revenues will not be affected. Other recurring revenue streams are within the scope of ASU 2014-09, including revenues associated with certain products and services offered by our banking and insurance businesses. Our preliminary analysis suggests that adoption of ASU 2014-09 is not expected to have a material impact on our financial condition or results of operations.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01 require all equity investments to be measured at fair value, with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those resulting in consolidation of the investee). The amendments in ASU 2016-01 also require an entity to present separately

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in “other comprehensive income” the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in ASU 2016-01 eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 is not expected to have a material effect on our consolidated statements of condition or results of operations.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize most leases, including operating leases, on-balance sheet via a right-to-use asset that will be depreciated over the term of the lease and a lease liability measured on a discounted basis. This will require many entities including Astoria Bank to include more existing leases on-balance sheet. We have identified several areas that are within the scope of ASU 2016-02, including Astoria Bank's contracts with respect to leased real estate and office equipment. We continue to evaluate the impact of ASU 2016-02, including determining whether other contracts exist that are deemed to be in scope. As such, no conclusions have yet been reached regarding the potential impact of adoption on our financial condition, results of operations or cash flows. ASU 2016-02 is effective for public companies for fiscal years beginning after December 15, 2018, including interim period within those fiscal years.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which require a financial asset measured at amortized cost to be presented 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 is to take place at the time an asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” methodology for recognizing credit losses required under current GAAP, which delays recognition until it is probable a loss has been incurred. The new standard is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of ASU 2016-13 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 becomes effective. While we have begun the process of compiling historical loss data by loan category, 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. Further, to date, no guidance has been issued by either our or Astoria Bank’s primary regulator with respect to how the impact of ASU 2016-13 is to be treated for regulatory capital purposes.

In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment,” as an update for entities that perform an annual goodwill impairment test. This update eliminates Step 2 from the goodwill impairment test and allows companies to measure impairment by comparing the fair value of a reporting unit with its carrying amount. Thus, an entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The new standard is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We continue to evaluate the impact of ASU 2017-04, but the adoption is not expected to have a material effect on our consolidated statements of condition or results of operations.

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ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q 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;
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 OCC, the FRB and the Consumer Financial Protection Bureau;
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;
the actual results of the proposed Sterling Merger could vary materially as a result of a number of factors, including the possibility that various closing conditions for the transaction may not be satisfied or waived, and the Sterling Merger Agreement could be terminated under certain circumstances;
the potential impact of the proposed Sterling Merger on relationships with third parties, including customers, employees and competitors; and
delays in closing the Sterling Merger.

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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Executive Summary

The following overview should be read in conjunction with our MD&A in its entirety.

Astoria Financial Corporation is a Delaware corporation organized as the unitary savings and loan holding company of Astoria Bank. Astoria Bank offers a wide range of financial services and solutions designed to meet customers’ personal, family and business banking needs.  Our goals are to enhance shareholder value while continuing to strengthen and expand our position as a more fully diversified, full service community bank. 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 NOW and demand deposit (checking), 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.

We are impacted by both national and regional economic factors, with residential mortgage loans from various regions of the country held in our portfolio and our multi-family and commercial real estate mortgage loan portfolio concentrated in the New York metropolitan area, which includes New York, New Jersey and Connecticut. Although U.S. economic activity has been expanding at a moderate pace since mid-2016, the operating environment continues to remain challenging. Interest rates have been at or near historical lows, despite the December 2016 and March 2017 actions by the Federal Open Market Committee, or FOMC, to raise the federal funds interest rate by 25 basis points in each instance. Long term interest rates have been volatile during the past year and sensitive to varied economic data, the uncertainty of the impact of the FOMC's rate increases and the divergence in monetary policy of the FOMC and its global counterparts. For example, the ten-year U.S. Treasury rate ranged between a high of 2.62% and a low of 1.36% throughout 2016, even though it began 2016 at 2.27% and ended it at 2.44%. During the first quarter of 2017, the ten-year U.S. Treasury rate has stabilized and was 2.39% at March 31, 2017. The national unemployment rate decreased to 4.5% for March 2017, compared to 4.7% for December 2016, and new job growth has been solid in recent months.

Net income available to common shareholders for the three months ended March 31, 2017 decreased compared to the three months ended March 31, 2016. The decrease was primarily attributable to a decline in net interest income and an increase in non-interest expense, partially offset by reduced income tax expense. The increase in non-interest expense was primarily due to a $4.0 million one-time charge associated with the recognition of the anticipated settlement cost related to lease obligations in connection with the residential lending team being relocated to other existing office space.

Net interest income for the three months ended March 31, 2017 decreased compared to the three months ended March 31, 2016. The decline was primarily due to a reduction in our residential mortgage loan portfolio, as well as declines in both the balance and average yield on our multi-family and commercial real estate mortgage loan portfolio.

The provision for loan losses credited to operations for the three months ended March 31, 2017 totaled $2.5 million compared to $3.1 million for the three months ended March 31, 2016. The allowance for loan losses totaled $82.5 million at March 31, 2017, compared to $86.1 million at December 31, 2016. The reduction in the allowance for loan losses at March 31, 2017 compared to December 31, 2016, and the provision credited to operations for the three months ended March 31, 2017, reflects the results of our quarterly review of the

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adequacy of the allowance for loan losses. Changes in the size and composition of our loan portfolio resulted in reduced reserve needs in the 2017 first quarter. We continue to maintain our allowance for loan losses at a level which we believe is appropriate given the continued improvement in our loan loss experience, as well as improved asset quality in our loan portfolio as a result of reductions in the balances of certain loan classes we believe bear higher risk, the quality of our loan originations and the contraction of the overall loan portfolio.

Non-interest income increased slightly for the three months ended March 31, 2017 compared to the three months ended March 31, 2016, reflecting an increase in mortgage banking income, net, partially offset by declines in customer service fee income and other income. Non-interest expense increased for the three months ended March 31, 2017 compared to the three months ended March 31, 2016, reflecting an increase in other expense and occupancy, equipment and systems expense, partially offset by reductions in compensation and benefits expense, federal deposit insurance premium expense and advertising expense. The increase in other expense was primarily due to a $4.0 million one-time charge associated with the recognition of the anticipated settlement cost related to lease obligations in connection with the residential lending team being relocated to other existing office space.

Total assets declined during the three months ended March 31, 2017, primarily due to decreases in our residential, multi-family and commercial real estate mortgage loan portfolios. The continued overall balance sheet decline reflects primarily the prolonged low interest rate environment which caused an excess of loan repayments over originations and purchases during the three months ended March 31, 2017 within the mortgage loan portfolios, particularly as it relates to residential loans. With respect to our multi-family and commercial real estate lending, the higher interest rate environment in the first quarter of 2017 as compared with the same period in 2016, had the effect of reducing refinancing activities by borrowers. In addition, we believe that market perceptions of Astoria's merger activities served to dampen opportunities for new business growth in the multi-family and commercial real estate portfolios.

As a result of a decrease in our loan portfolios, borrowed funds declined during the three months ended March 31, 2017. An increase in core deposits also served to reduce borrowing needs. The growth in core deposits reflected increases in money market, checking and savings accounts. At March 31, 2017, core deposits represented 82% of total deposits, unchanged from December 31, 2016. Total deposits included $1.16 billion of business deposits at March 31, 2017, an increase of 7% since December 31, 2016, substantially all of which were core deposits, reflecting the expansion of our business banking operations, a significant component of the strategic shift in our balance sheet. We expect that the continued growth of our business banking operations should allow us to continue to grow our low cost core deposits.

Stockholders’ equity increased to $1.72 billion as of March 31, 2017 compared to $1.71 billion as of December 31, 2016. The increase was primarily the result of earnings in excess of dividends on our common and preferred stock and stock-based compensation recognized during the three months ended March 31, 2017.

Merger Agreement with Sterling Bancorp

On March 6, 2017, Astoria entered into the Sterling Merger Agreement. The Sterling Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Astoria will merge with and into Sterling, with Sterling as the surviving corporation. Immediately following the consummation of the Sterling Merger, Astoria’s wholly owned subsidiary, Astoria Bank, will merge with and into Sterling’s wholly owned subsidiary, Sterling National Bank. Sterling National Bank will be the surviving entity in the Sterling Bank Merger. The Sterling Merger Agreement was unanimously approved and adopted by the Board of Directors of each of Astoria and Sterling.

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Subject to the terms and conditions of the Sterling Merger Agreement, at the Effective Time of the Sterling Merger, Astoria stockholders will have the right to receive 0.875 shares of Sterling Common Stock for each share of Astoria Common Stock. Also in the Sterling Merger, each share of Astoria 6.50% Non-Cumulative Perpetual Preferred Stock, Series C, par value $1.00 per share, with a liquidation preference of $1,000 per share, issued and outstanding immediately prior to the Effective Time will be automatically converted into the right to receive one share of Sterling 6.50% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $1,000 per share.

The Sterling Merger Agreement contains customary representations and warranties from both Astoria and Sterling, and each party has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of Astoria’s and Sterling’s businesses during the interim period between the execution of the Sterling Merger Agreement and the Effective Time, (2) the obligation of Sterling to call a meeting of its stockholders to adopt the Sterling Merger Agreement and approve an amendment to its charter to increase the authorized shares of Sterling Common Stock from 190 million to 310 million, and, subject to certain exceptions, to recommend that its stockholders adopt the Sterling Merger Agreement and the transactions contemplated thereby, (3) the obligation of Astoria to call a meeting of its stockholders to adopt the Sterling Merger Agreement, and, subject to certain exceptions, to recommend that its stockholders adopt the Sterling Merger Agreement, and (4) Astoria’s non-solicitation obligations relating to alternative acquisition proposals. Astoria and Sterling have agreed to use their reasonable best efforts to prepare and file all applications, notices, and other documents to obtain all necessary consents and approvals for consummation of the transactions contemplated by the Sterling Merger Agreement.

The completion of the Sterling Merger is subject to customary conditions, including (1) adoption of the Sterling Merger Agreement by Astoria’s stockholders, (2) adoption of the Sterling Merger Agreement and approval of the Sterling charter amendment by Sterling’s stockholders, (3) authorization for listing on the New York Stock Exchange of the shares of Sterling Common Stock to be issued in the Sterling Merger, (4) the receipt of required regulatory approvals, including the approval of the FRB and the OCC, (5) effectiveness of the registration statement on Form S-4 for the Sterling Common Stock to be issued in the Sterling Merger, and (6) the absence of any order, injunction or other legal restraint preventing the completion of the Sterling Merger or making the completion of the Sterling Merger illegal. The registration statement on Form S-4 for the Sterling Common Stock to be issued in the Sterling Merger was filed on April 5, 2017 and was declared effective by the SEC on April 28, 2017. Special meetings of Astoria’s and Sterling’s respective stockholders are scheduled to be held on June 13, 2017, at which Astoria’s stockholders will vote on the Sterling Merger Agreement and Sterling’s stockholders will vote on the Sterling Merger Agreement and the Sterling charter amendment. In addition, all applications and notices necessary to obtain the required regulatory approvals to complete the Sterling Merger have been submitted or sent by Astoria or Sterling.

Each party’s obligation to complete the Sterling Merger is also subject to certain additional customary conditions, including (1) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (2) performance in all material respect by the other party of its obligations under the Sterling Merger Agreement, and (3) receipt by such party of an opinion from its counsel to the effect that the Sterling Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code.

The Sterling Merger Agreement also provides certain termination rights for both Astoria and Sterling and further provides that a termination fee of $75.7 million will be payable by either Astoria or Sterling, as applicable, upon termination of the Sterling Merger Agreement under certain circumstances.



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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 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 SEC.  Such reports are also available on the SEC’s website at www.sec.gov/edgar/searchedgar/webusers.htm.


Critical Accounting Policies

Note 1 of Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of our 2016 Annual Report on Form 10-K, as supplemented by this report, contains a summary of our significant accounting policies.  Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.  Our policies with respect to the methodologies used to determine the allowance for loan losses, the valuation of MSR, judgments regarding goodwill and securities impairment and the estimates related to income taxes and our pension plans and other postretirement benefits are our most critical accounting policies because they are important to the presentation of our financial condition and results of operations, involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions and estimates about highly uncertain matters.  Actual results may differ from our assumptions, estimates and judgments.  The use of different assumptions, estimates and judgments could result in material differences in our results of operations or financial condition.  These critical accounting policies are reviewed quarterly with the Audit Committee of our Board of Directors.  The following description of these policies should be read in conjunction with the corresponding section of our 2016 Annual Report on Form 10-K.

Allowance for Loan Losses

We establish and maintain an allowance for loan losses based on our evaluation of the probable inherent losses in our loan portfolio. Loan charge-offs in the period the loans, or portions thereof, are deemed uncollectible reduce the allowance for loan losses. Recoveries of amounts previously charged-off increase the allowance for loan losses in the period they are received. The allowance is adjusted to an appropriate level through provisions for loan losses charged or credited to operations to increase or decrease the allowance based on a comprehensive analysis of our loan portfolio. We evaluate the adequacy of the allowance on a quarterly basis. The allowance is comprised of both valuation allowances related to individual loans and general valuation allowances, although the total allowance for loan losses is available for losses applicable to the entire loan portfolio. In estimating specific allocations of the allowance, we review loans deemed to be impaired and measure impairment losses based on either the fair value of the collateral, the observable market price of the loan or the present value of expected future cash flows. A loan is considered impaired when, based upon current information and events, it is probable that we will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement. 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

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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.

Our Asset Review Department utilizes a risk-based loan review approach for multi-family and commercial real estate mortgage loans and commercial and industrial loans. Under this approach, individual loans are selected by a combination of individual loan reviews, targeted loan reviews, concentration of credit reviews and reviews of loans to one borrower to achieve, at a minimum on an annual basis, a review coverage rate of the outstanding principal balance of 30% for the multi-family mortgage loan portfolio, 40% for the commercial real estate mortgage loan portfolio and 60% for the commercial and industrial loan portfolio. Further, multi-family and commercial real estate management personnel also perform annual reviews for certain multi-family and commercial real estate mortgage loans and recommend further review by our Credit and Asset Review Departments as appropriate. The residential mortgage loan portfolio and home equity and other consumer loan portfolio are reviewed collectively by delinquency and net loss trends.

Our 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. 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-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.

Other current and anticipated economic conditions on which our individual valuation allowances rely are the impact that national and/or local economic and business conditions may have on borrowers, the impact that local real estate markets may have on collateral values, the level and direction of interest rates and their combined effect on real estate values and the ability of borrowers to service debt. For multi-family and commercial real estate loans, additional factors specific to a borrower or the underlying collateral are considered. These factors include, but are not limited to, the composition of tenancy, occupancy levels for the property, location of the property, cash flow estimates and, to a lesser degree, the existence of personal guarantees. We also review all regulatory notices, bulletins and memoranda with the purpose of identifying upcoming changes in regulatory conditions which may impact our calculation of individual valuation allowances. Our primary banking regulator periodically reviews our reserve methodology during regulatory examinations and any comments regarding changes to reserves or loan classifications are considered by management in determining valuation allowances.

The determination of the loans on which full collectability is not reasonably assured, the estimates of the fair value of the underlying collateral and the assessment of economic and regulatory conditions are subject to

41


assumptions and judgments by management. Individual valuation allowances and charge-off amounts could differ materially as a result of changes in these assumptions and judgments.

Estimated losses for loans that are not individually deemed to be impaired are determined on a loan pool basis using our historical loss experience and various other qualitative factors and comprise our general valuation allowances. General valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with our lending activities which, unlike individual valuation allowances, have not been allocated to particular loans. The determination of the adequacy of the general valuation allowances takes into consideration a variety of factors.

We segment our residential mortgage loan portfolio by interest-only and amortizing loans, full documentation and reduced documentation loans, and origination time periods, and analyze our historical loss experience and delinquency levels and trends of these segments.  We analyze multi-family and commercial real estate mortgage loans by portfolio using predictive modeling techniques for loans originated after 2010 and by geographic location for loans originated prior to 2011. We analyze our consumer and other loan portfolio by home equity lines of credit, commercial and industrial loans and other consumer loans and perform similar historical loss analyses. In our analysis of non-performing loans, we consider our aggregate historical loss experience with respect to the ultimate disposition of the underlying collateral along with the migration of delinquent loans based on the portfolio segments noted above. These analyses and the resulting loss rates are used as an integral part of our judgment in developing estimated loss percentages to apply to the loan portfolio segments. We monitor credit risk on interest-only hybrid adjustable rate mortgage, or ARM, loans that were underwritten at the initial note rate, which may have been a discounted rate, in the same manner that we monitor credit risk on all interest-only hybrid ARM loans. We monitor interest rate reset dates of our loan portfolio, in the aggregate, and the current interest rate environment and consider the impact, if any, on borrowers’ ability to continue to make timely principal and interest payments in determining our allowance for loan losses. We also consider the size, composition, risk profile and delinquency levels of our loan portfolio, as well as our credit administration and asset management procedures. We monitor property value trends in our market areas by reference to various industry and market reports, economic releases and surveys, and our general and specific knowledge of the real estate markets in which we lend, in order to determine what impact, if any, such trends may have on the level of our general valuation allowances. In addition, we evaluate and consider the impact that current and anticipated economic and market conditions may have on the loan portfolio and known and inherent risks in the portfolio. We update our analyses quarterly and refine our evaluations as experience provides clearer guidance, our product offerings change and as economic conditions evolve.

Our evaluation of loss experience factors considers trends in such factors over the prior three years, as well as an estimate of the average amount of time from an event signaling the potential inability of a borrower to continue to pay as agreed to the point at which a loss is confirmed, for substantially all of the loan portfolio, with the exception of multi-family and commercial real estate mortgage loans originated after 2010, for which our evaluation includes predictive modeling techniques. We also analyze our historical loss experience over 12, 15, 18 and 24 month periods. The loss history used in calculating our quantitative allowance coverage percentages varies based on loan type. Also, for a particular loan type, we may not have sufficient loss history to develop a reasonable estimate of loss and in these instances we may consider our loss experience for other, similar loan types and may evaluate those losses over a longer period than two years. Additionally, multi-family and commercial real estate loss experience may be adjusted based on the composition of the losses (loan sales, short sales and partial charge-offs). Modeling techniques utilize data inputs for each loan in the portfolio, including credit facility terms and performance to date, property details and borrower financial performance data. The model also incorporates real estate market data from an established real estate market database company to forecast future performance of the properties, and includes a loan loss predictive model

42


based on studies of defaulted commercial real estate loans. The model then generates a probability of default, loss given default and ultimately an estimated loss for each loan quarterly over the remaining life of the loan. The appropriate timeframe from which to assign an estimated loss percentage to the pool of loans is assessed by management. We update our historical loss analyses, as well as our predictive model, quarterly and evaluate the need to modify our quantitative allowances as a result of our updated charge-off and loss analyses.

We also consider qualitative factors with the purpose of assessing the adequacy of the overall allowance for loan losses as well as the allocation of the allowance for loan losses by loan category. The qualitative factors we consider generally include, but are not limited to, changes in (1) lending policies and procedures, (2) economic and business conditions and developments that affect collectability of our loan portfolio, (3) the nature and volume of our loan portfolio and in the terms of loans, (4) the experience, ability and depth of lending management and other staff, (5) the volume and severity of past due, non-accrual and adversely classified loans, (6) the quality of the loan review system, (7) the value of underlying collateral, (8) the existence or effect of any credit concentrations, (9) external factors such as competition and legal or regulatory requirements and (10) factors arising outside the scope of the aforementioned nine factors may also be considered as appropriate. In addition to the ten qualitative factors noted, we also review certain analytical information such as our coverage ratios and peer analysis.

We use ratio analyses as a supplemental tool for evaluating the overall reasonableness and adequacy of the allowance for loan losses. As such, we consider our asset quality ratios as well as the allowance ratios and coverage percentages set forth in both peer group and regulatory agency data. We also consider any comments from our primary banking regulator resulting from their review of our general valuation allowance methodology during regulatory examinations. We consider the observed trends in our asset quality ratios in combination with our primary focus on our historical loss experience and the impact of current economic conditions. After evaluating these variables, we determine appropriate allowance coverage percentages for each of our portfolio segments and the appropriate level of our allowance for loan losses. We do not determine the appropriate level of our allowance for loan losses based exclusively on a single factor or asset quality ratio. We periodically review the actual performance and charge-off history of our loan portfolio and compare that to our previously determined allowance coverage percentages and individual valuation allowances. In doing so, we evaluate the impact the previously mentioned variables may have had on the loan portfolio to determine which changes, if any, should be made to our assumptions and analyses.

Allowance adequacy calculations are adjusted quarterly, based on the results of our quantitative and qualitative analyses, to reflect our current estimates of the amount of probable losses inherent in our loan portfolio. Allocations of the allowance to each loan category are adjusted quarterly to reflect probable inherent losses using the same quantitative and qualitative analyses used in connection with the overall allowance adequacy calculations. The portion of the allowance allocated to each loan category does not represent the total available to absorb losses which may occur within the loan category, since the total allowance for loan losses is available for losses applicable to the entire loan portfolio.

Based on our evaluation of the composition and size of our loan portfolio, the levels and composition of delinquent and non-performing loans, our loss history, the housing and real estate markets and the current economic environment, we determined that an allowance for loan losses of $82.5 million was appropriate at March 31, 2017, compared to $86.1 million at December 31, 2016. The provision for loan losses credited to operations totaled $2.5 million for the three months ended March 31, 2017.

The balance of our allowance for loan losses represents management’s best estimate of the probable inherent losses in our loan portfolio at the reporting dates.  Actual results could differ from our estimates as a result of changes in economic or market conditions.  Changes in estimates could result in a material change in the

43


allowance for loan losses.  While we believe that the allowance for loan losses has been established and maintained at levels that reflect the risks inherent in our loan portfolio, future adjustments may be necessary if portfolio performance or economic or market conditions differ substantially from the conditions that existed at the time of the initial determinations.

For additional information regarding our allowance for loan losses, see “Provision for Loan Losses Credited to Operations” and “Asset Quality” in this document and Part II, Item 7, “MD&A,” in our 2016 Annual Report on Form 10-K.

Valuation of MSR

The initial asset recognized for originated MSR is measured at fair value.  The fair value of MSR is estimated by reference to current market values of similar loans sold servicing released.  MSR are amortized in proportion to and over the period of estimated net servicing income.  We apply the amortization method for measurement of our MSR.  MSR are assessed for impairment based on fair value at each reporting date.  Impairment exists if the carrying value of MSR exceeds the estimated fair value. The estimated fair value of MSR is obtained through independent third party valuations.  MSR impairment, if any, is recognized in a valuation allowance with a corresponding charge to earnings.  Increases in the fair value of impaired MSR are recognized only up to the amount of the previously recognized valuation allowance.

At March 31, 2017, our MSR had a carrying value of $10.2 million, net of a valuation allowance of $2.0 million, which approximated the estimated fair value based on expected future cash flows considering a weighted average discount rate of 9.93%, a weighted average constant prepayment rate on mortgages of 10.24% and a weighted average life of 6.1 years. At December 31, 2016, our MSR had a carrying value of $10.1 million, net of a valuation allowance of $2.2 million, which approximated the estimated fair value based on expected future cash flows considering a weighted average discount rate of 9.94%, a weighted average constant prepayment rate on mortgages of 10.63% and a weighted average life of 6.0 years.

The fair value of MSR is highly sensitive to changes in assumptions.  Changes in prepayment speed assumptions generally have the most significant impact on the fair value of our MSR.  Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR.  As interest rates rise, mortgage loan prepayments slow down, which results in an increase in the fair value of MSR.  Thus, any measurement of the fair value of our MSR is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different point in time.

Goodwill Impairment

Goodwill is presumed to have an indefinite useful life and is tested, at least annually, for impairment at the reporting unit level.  If the estimated fair value of the reporting unit exceeds its carrying amount, further evaluation is not necessary.  However, if the fair value of the reporting unit is less than its carrying amount, further evaluation is required to compare the implied fair value of the reporting unit’s goodwill to its carrying amount to determine if a write-down of goodwill is required.  Impairment exists when the carrying amount of goodwill exceeds its implied fair value.

For purposes of our goodwill impairment testing, we have identified a single reporting unit.  We consider the quoted market price of our common stock on our impairment testing date as an initial indicator of estimating the fair value of our reporting unit.  We also consider the average price of our common stock, both before and after our impairment test date, as well as market-based control premiums in determining the

44


estimated fair value of our reporting unit.  In addition to our internal goodwill impairment analysis, we periodically obtain a goodwill impairment analysis from an independent third party valuation firm.  The independent third party utilizes multiple valuation approaches including comparable transactions, control premium, public market peers and discounted cash flow.  Management reviews the assumptions and inputs used in the third party analysis for reasonableness.

At March 31, 2017, the carrying amount of our goodwill totaled $185.2 million. As of September 30, 2016, we performed our annual goodwill impairment test internally and obtained an independent third party analysis and concluded there was no goodwill impairment. We would test our goodwill for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount. No events have occurred and no circumstances have changed since our annual impairment test date that would more likely than not reduce the fair value of our reporting unit below its carrying amount. The identification of additional reporting units, the use of other valuation techniques or changes to the input assumptions used in our analysis or the analysis by our third party valuation firm could result in materially different evaluations of impairment.

Securities Impairment

Our available-for-sale securities portfolio is carried at estimated fair value with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity.  Debt securities which we have the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost.  The fair values for our securities are obtained from an independent nationally recognized pricing service.

Our securities portfolio is comprised primarily of fixed rate mortgage-backed securities guaranteed by a GSE as issuer. GSE issuance mortgage-backed securities comprised 84% of our securities portfolio at March 31, 2017. Non-GSE issuance mortgage-backed securities at March 31, 2017 comprised less than 1% of our securities portfolio and had an amortized cost of $1.3 million, with 86% classified as available-for-sale and 14% classified as held-to-maturity. Our non-GSE issuance securities are primarily investment grade securities and have performed similarly to our GSE issuance securities. Credit quality concerns have not significantly impacted the performance of our non-GSE securities or our ability to obtain reliable prices. The balance of our securities portfolio is primarily comprised of debt securities issued by GSEs.

The fair value of our securities portfolio is primarily impacted by changes in interest rates. We conduct a periodic review and evaluation of the securities portfolio to determine if a decline in the fair value of any security below its cost basis is other-than-temporary. Our evaluation of other-than-temporary impairment, or OTTI, considers the duration and severity of the impairment, our assessments of the reason for the decline in value, the likelihood of a near-term recovery and our intent and ability to hold the securities. We generally view changes in fair value caused by changes in interest rates as temporary, which is consistent with our experience. If such decline is deemed other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged to earnings as a component of non-interest income, except for the amount of the total OTTI for a debt security that does not represent credit losses which is recognized in other comprehensive income/loss, net of applicable taxes. At March 31, 2017, we held 195 securities with an estimated fair value totaling $2.2 billion which had an unrealized loss totaling $58.2 million. Of the securities in an unrealized loss position at March 31, 2017, $272.1 million, with an unrealized loss of $9.6 million, had been in a continuous unrealized loss position for 12 months or longer. At March 31, 2017, the impairments were deemed temporary based on (1) the direct relationship of the decline in fair value to movements in interest rates, (2) the estimated remaining life and high credit quality of the investments and (3) the fact that we had no intention to sell these securities and it was not more likely than not that we would be required to

45


sell these securities before their anticipated recovery of the remaining amortized cost basis and we expected to recover the entire amortized cost basis of the security.

Income Taxes

Our provision for income tax expense is based on our income, statutory tax rates and other provisions of tax law applicable to us in various jurisdictions. We file income tax returns in the United States federal jurisdiction and in New York State and New York City jurisdictions, as well as various other state jurisdictions in which we do business. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws to our business activities, as well as the timing of when certain items may affect taxable income. Our interpretations may be subject to review during examination by taxing authorities and disputes may arise over our tax positions. We attempt to resolve these disputes during the tax examination and audit process and ultimately through the court systems when applicable. Changes to our income tax estimates can occur due to changes in tax rates, implementation of new business strategies, resolution of matters with taxing authorities regarding previously taken tax positions and newly enacted statutory, judicial and regulatory guidance. Such changes could affect the amount of our provision for income taxes and could be material to our financial condition or results of operations.

Our income tax expense consists of income taxes that are currently payable and deferred income taxes. We also maintain a reserve related to certain tax positions and strategies that management believes contain an element of uncertainty and evaluate each of our tax positions and strategies to determine whether the reserve continues to be appropriate. Accruals of interest and penalties related to unrecognized tax benefits are recognized in income tax expense. Our current income tax expense approximates taxes to be paid or refunded for the current period. Our deferred income tax expense results from changes in our deferred tax assets and liabilities between periods. Deferred tax assets and liabilities represent decreases or increases in taxes expected to be paid in the future because of future reversals of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and net operating loss carryforwards. We assess our deferred tax assets and establish a valuation allowance if realization of a deferred tax asset is not considered to be more likely than not. We evaluate the recoverability of these future tax deductions by assessing the adequacy of expected taxable income from all sources, including taxable income in carryback years, reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of taxable income rely heavily on estimates and we use our historical experience and our short- and long-range business forecasts in making such estimates. We have recorded deferred tax assets, net of deferred tax liabilities, of $94.5 million at March 31, 2017, compared to $93.1 million at December 31, 2016, with no valuation allowance being appropriate for either period. We believe that our historical and future results of operations, and tax planning strategies which could be employed, will more likely than not generate sufficient taxable income to enable us to realize our net deferred tax assets. If changes in circumstances lead us to change our judgment about our ability to realize deferred tax assets in future years, we would adjust our valuation allowances in the period that our change in judgment occurs and record a corresponding increase or charge to income.

Pension Benefits and Other Postretirement Benefit Plans

Astoria Bank has a qualified, non-contributory defined benefit pension plan covering employees meeting specified eligibility criteria.  In addition, Astoria Bank has non-qualified and unfunded supplemental retirement plans covering certain officers and directors.  In 2012, all such plans were amended to, among other things, change the manner in which benefits were computed for service through April 30, 2012 and to suspend accrual of additional benefits effective April 30, 2012.  We also sponsor a health care plan that provides for postretirement medical and dental coverage to select individuals.

46



We recognize the overfunded or underfunded status of our defined benefit pension plans and other postretirement benefit plan, which is measured as the difference between plan assets at fair value and the benefit obligation at the measurement date, in other assets or other liabilities in our consolidated statements of financial condition.  Changes in the funded status are recognized through other comprehensive income/loss in the period in which the changes occur. Astoria Bank’s policy is to fund pension costs in accordance with the minimum funding requirement.

There are several key assumptions which we provide our actuary which have a significant impact on the pension benefits and other postretirement benefit obligations as well as benefits expense.  These include the discount rate and the expected return on plan assets.  We continually review and evaluate all actuarial assumptions affecting the pension benefits and other postretirement benefit plans.  We monitor these rates in relation to the current market interest rate environment and update our actuarial analysis accordingly.

The discount rate is used to calculate the present value of the benefit obligations at the measurement date and the expense to be recorded in the following period.  A lower discount rate will result in a higher benefit obligation and expense, while a higher discount rate will result in a lower benefit obligation and expense.  Discount rate assumptions are determined by reference to the Citigroup Pension Discount Curve, adjusted for Astoria Bank benefit plan specific cash flows.  We compare these rates to other yield curves and market indices, such as the Mercer Mature Plan Index and Bloomberg AA Discount Curve, for reasonableness and make adjustments, as necessary, so the discount rates used reflect current market data and trends.

To determine the expected return on plan assets, we consider the long-term historical return information on plan assets, the mix of investments that comprise plan assets and the historical returns on indices comparable to the fund classes in which the plan invests.

For further information on the actuarial assumptions used for our pension benefits and other postretirement benefit plans, see Note 14 of Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” in our 2016 Annual Report on Form 10-K.


Liquidity and Capital Resources

Our primary source of funds is cash provided by principal and interest payments on loans and securities. The most significant liquidity challenge we face is the variability in cash flows as a result of changes in mortgage refinance activity. Principal payments on loans and securities decreased to $647.2 million for the three months ended March 31, 2017, compared to $700.5 million for the three months ended March 31, 2016.

In addition to cash provided by principal and interest payments on loans and securities, our other sources of funds include cash provided by operating activities, deposits and borrowings. Net cash provided by operating activities totaled $31.0 million for the three months ended March 31, 2017 and $27.4 million for the three months ended March 31, 2016. Deposits increased $113.2 million during the three months ended March 31, 2017 and decreased $54.5 million during the three months ended March 31, 2016. The increase for the three months ended March 31, 2017 was due to a net increase in core deposits, partially offset by a decrease in certificates of deposit. The decrease in deposits for the three months ended March 31, 2016 was due to a decrease in certificates of deposit, partially offset by a net increase in core deposits. During the three months ended March 31, 2017 and 2016, we continued to allow high cost certificates of deposit to run off. Total deposits included business deposits of $1.16 billion at March 31, 2017, an increase of $75.6 million since December 31, 2016. At March 31, 2017, core deposits represented 82% of total deposits. We have continued

47


our efforts to reposition the liability mix of our balance sheet, reducing the balance of high cost certificates of deposit and increasing the balance of low cost core deposits. Net borrowings decreased $389.9 million during the three months ended March 31, 2017 compared to a decrease of $64.9 million during the three months ended March 31, 2016. The decrease in net borrowings for the three months ended March 31, 2017 was due to reduced funding needs for the quarter.

Our primary use of funds is for the origination and purchase of mortgage loans and, to a lesser degree, for the purchase of securities. Gross mortgage loans originated and purchased for portfolio during the three months ended March 31, 2017 totaled $230.8 million, of which $95.0 million were multi-family and commercial real estate mortgage loan originations, $77.1 million were residential mortgage loan originations and $58.7 million were purchases of individual residential mortgage loans through our third party loan origination program. This compares to gross mortgage loans originated and purchased for portfolio during the three months ended March 31, 2016 totaling $306.9 million, of which $217.4 million were multi-family and commercial real estate mortgage loan originations, $60.8 million were residential mortgage loan originations and $28.7 million were residential mortgage loan purchases. Given the low interest rate environment, and consistent with our strategy to diversify our earning assets, we have focused on multi-family and commercial real estate mortgage lending and our business banking operations, with reduced emphasis on the origination and purchase of residential mortgage loans. Although residential mortgage loan originations and purchases increased during the three months ended March 31, 2017, they did not keep pace with the level of repayments during the same period, resulting in a net reduction in that portfolio of $150.6 million. Multi-family and commercial real estate mortgage loan originations declined for the three months ended March 31, 2017 compared to the three months ended March 31, 2016, reflective of reduced refinancing activities by borrowers, a result of a higher interest rate environment. In addition, we believe that market perceptions of Astoria’s merger activities served to dampen opportunities for new business growth in the multi-family and commercial real estate portfolios. Purchases of securities totaled $192.6 million during the three months ended March 31, 2017 and $354.4 million during the three months ended March 31, 2016.

Our policies and procedures with respect to managing funding and liquidity risk are established to ensure our safe and sound operation in compliance with applicable bank regulatory requirements. Our liquidity management process is sufficient to meet our daily funding needs and cover both expected and unexpected deviations from normal daily operations. Processes are in place to appropriately identify, measure, monitor and control liquidity and funding risk. The primary tools we use for measuring and managing liquidity risk include cash flow projections, diversified funding sources, key risk indicators, stress testing, a cushion of liquid assets and an up to date contingency funding plan.

We maintain liquidity levels to meet our operational needs in the normal course of our business and to be prepared for the possibility of adverse conditions which could result in the need for additional liquidity. The levels of our liquid assets during any given period are dependent on our operating, investing and financing activities. Cash and due from banks totaled $139.3 million at March 31, 2017 and $129.9 million at December 31, 2016. At March 31, 2017, we had $1.30 billion of borrowings with a weighted average interest rate of 1.73% maturing over the next 12 months. We have the flexibility to either repay or rollover these borrowings as they mature. Included in our borrowings are various obligations which, by their terms, may be called by the counterparty. At March 31, 2017, we had $1.95 billion of callable borrowings, which were contractually callable by the counterparty within the next three months 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. At March 31, 2017, FHLB-NY advances totaled $1.70 billion, or 52% of total borrowings. We do not believe any of our borrowing counterparty

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concentrations represent a material risk to our liquidity. In addition, we had $597.0 million of certificates of deposit at March 31, 2017 with a weighted average interest rate of 0.57% maturing over the next 12 months. We believe we have the ability to retain or replace a significant portion of such deposits based on our pricing and historical experience.

The following table details our borrowing and certificate of deposit maturities and their weighted average interest rates at March 31, 2017.
 
Borrowings
 
Certificates of Deposit
 
 
 
 
Weighted
Average
Rate
 
 
 
Weighted
Average
Rate
 
 
 
 
 
 
 
(Dollars in Millions)
Amount
 
 
 
Amount
 
Contractual Maturity:
 

 
 
 

 
 
 

 
 

 
12 months or less
$
1,295

(1)
 
1.73
%
 
 
$
597

 
0.57
%
 
13 to 36 months
800

(2)
 
3.56

 
 
608

 
1.27

 
37 to 60 months
1,150

(2)
 
3.54

 
 
368

 
1.52

 
Over 60 months

 
 

 
 
1

 
1.64

 
Total
$
3,245

 
 
2.82
%
 
 
$
1,574

 
1.06
%
 

(1)
Includes $250.0 million of 5.00% senior notes, which mature on June 19, 2017.
(2)
Callable by the counterparty within the next three months and on a quarterly basis thereafter.

Through the Federal Reserve Bank of New York discount window we have the ability to borrow additional funds should the need arise on a short-term basis, primarily overnight. Our borrowing capacity through the discount window totaled approximately $568.0 million at March 31, 2017. In order to have the ability to borrow through the discount window, the Federal Reserve Bank of New York requires that collateral is pledged. In accordance with such requirements, at March 31, 2017, we had pledged as collateral with the Federal Reserve Bank of New York securities with an amortized cost of $154.6 million and commercial real estate mortgage loans with an unpaid principal balance of $900.1 million. We view the discount window as a secondary source of liquidity and, during the three months ended March 31, 2017, we did not utilize this source.

Through its membership in the FHLB-NY, Astoria Bank has access to borrowings on an overnight and term basis to the extent that it has qualifying collateral in place at the FHLB-NY. At March 31, 2017, Astoria Bank had residential mortgage loans pledged to the FHLB-NY sufficient to support additional borrowings of approximately $2.58 billion.

Astoria Bank also has the ability to use its portfolio of unencumbered investment securities available for sale and held to maturity as collateral for borrowings from the Federal Reserve Bank of New York, the FHLB-NY and repurchase agreement counterparties. At March 31, 2017, Astoria Bank had approximately $1.68 billion (amortized cost) of investment securities available to be pledged to support borrowings.

Additional sources of liquidity at the holding company level have included public and private issuances of debt and equity securities into the capital markets.  Holding company debt obligations are included in other borrowings.  We have a shelf registration statement on Form S-3 on file with the SEC that we renewed in the 2015 second quarter, which allows us to periodically offer and sell, from time to time, in one or more offerings, individually or in any combination, common stock, preferred stock, depositary shares, senior notes, subordinated notes, warrants to purchase common stock or preferred stock and units consisting of one or more of the foregoing.  This shelf registration statement provides us with greater capital management flexibility and enables us to more readily access the capital markets in order to pursue growth opportunities that may become available to us in the future or should there be any changes in the regulatory environment

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that call for increased capital requirements.  Although the shelf registration statement does not limit the amount of the foregoing items that we may offer and sell, our ability and any decision to do so is subject to market conditions and our capital needs.  Our ability to continue to access the capital markets for additional financing at favorable terms may be limited by, among other things, market conditions, interest rates, our capital levels, Astoria Bank’s ability to pay dividends to Astoria Financial Corporation, our credit profile and ratings and our business model. In addition, pursuant to the terms of the Sterling Merger Agreement, we are limited in our ability to issue or sell our capital stock without the consent of Sterling. Sterling has agreed not to unreasonably withhold any such consent. In addition, the Sterling Merger Agreement permits us to refinance all or a portion of our $250.0 million outstanding 5.00% senior notes due June 19, 2017 at market rates and terms through an issuance of new unsecured debt or an extension of the maturity of such notes.

We have registered 1,500,000 shares of our common stock under the Securities Act for offer and sale from time to time pursuant to the Astoria Financial Corporation Dividend Reinvestment and Stock Purchase Plan, or the Stock Purchase Plan, which allows our shareholders to automatically reinvest the cash dividend paid on all or a portion of their shares of our common stock into additional shares of our common stock and make optional cash purchases, up to $10,000 per month, of additional shares of our common stock, unless we grant a waiver permitting a higher amount of optional cash purchases. Shares of common stock may be purchased either directly from us from authorized but unissued shares or from treasury shares, or on the open market. During the three months ended March 31, 2017, 1,822 shares of our common stock were purchased pursuant to the dividend reinvestment provisions of the Stock Purchase Plan directly from us from treasury shares for net proceeds totaling $34,000.

Astoria Financial Corporation’s primary uses of funds include payment of dividends on common and preferred stock and payment of interest on its debt obligations. During the three months ended March 31, 2017, Astoria Financial Corporation paid dividends on common and preferred stock totaling $6.2 million. On March 17, 2017, our Board of Directors declared a quarterly cash dividend on the Series C Preferred Stock aggregating $2.2 million, or $16.25 per share, for the quarterly period from January 15, 2017 through and including April 14, 2017, which was paid on April 17, 2017 to stockholders of record as of March 31, 2017. On April 26, 2017, our Board of Directors declared a quarterly cash dividend of $0.04 per share on shares of our common stock payable on May 22, 2017 to stockholders of record as of May 8, 2017.

Our ability to pay dividends, service our debt obligations and repurchase common stock is dependent primarily upon receipt of capital distributions from Astoria Bank. On April 5, 2017, Astoria Bank paid dividends to Astoria Financial Corporation totaling $12.5 million. Since Astoria Bank is a federally chartered savings association, there are regulatory limits on its ability to make distributions to Astoria Financial Corporation. See Part I, Item 1, “Business - Regulation and Supervision - Limitations on Capital Distributions,” in our 2016 Annual Report on Form 10-K for further discussion of limitations on capital distributions from Astoria Bank. In addition, pursuant to the terms of the Sterling Merger Agreement, we may not pay quarterly cash dividends in excess of $0.04 per share of Astoria Common Stock or repurchase shares of Astoria Common Stock without the consent of Sterling. Sterling has agreed not to unreasonably withhold any such consent.

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

At March 31, 2017, our tangible common equity ratio, which represents common stockholders’ equity less goodwill divided by total assets less goodwill, was 9.95%. Pursuant to the Reform Act, in July 2013, the Agencies issued 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 Basel III capital standards. For a more detailed

50


description of these rules, see Part I, Item 1, “Business - Regulation and Supervision - Capital Requirements,” in our 2016 Annual Report on Form 10-K. At March 31, 2017, the capital levels of both Astoria Financial Corporation and Astoria Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes and above the minimum levels required to satisfy the newly applicable capital Conservation Buffer imposed pursuant to the Reform Act.

At March 31, 2017, Astoria Financial Corporation's Tier 1 leverage capital ratio was 11.12%, Common equity tier 1 risk-based capital ratio was 18.02%, Tier 1 risk-based capital ratio was 19.60% and Total risk-based capital ratio was 20.62%, and Astoria Bank’s Tier 1 leverage capital ratio was 12.44%, Common equity tier 1 risk-based and Tier 1 risk-based capital ratios were 21.86% and Total risk-based capital ratio was 22.89%. For additional information on the regulatory capital ratios of Astoria Financial Corporation and Astoria Bank at March 31, 2017, see Note 11 of Notes to Consolidated Financial Statements (Unaudited) in Part I, Item 1, "Financial Statements (Unaudited)."


Off-Balance Sheet Arrangements and Contractual Obligations

We are a party to financial instruments with off-balance sheet risk in the normal course of our business in order to meet the financing needs of our customers and in connection with our overall interest rate risk management strategy.  These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk.  In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts.  Such instruments primarily include lending commitments and lease commitments.

Lending commitments include commitments to originate and purchase loans and commitments to fund unused lines of credit.  We also have commitments to fund loans held-for-sale and commitments to sell loans in connection with our mortgage banking activities which are considered derivative financial instruments.  Commitments to sell loans totaled $22.2 million at March 31, 2017.  The fair values of our mortgage banking derivative financial instruments are immaterial to our financial condition and results of operations.

The following table details our contractual obligations at March 31, 2017.
 
Payments Due by Period
(In Thousands)
Total
 
Less than
One Year
Over
One to
Three Years
 
Over
Three to
Five Years
More than
Five Years
On-balance sheet contractual obligations:
 

 
 

 
 

 
 
 

 
 

 
Borrowings with original terms greater than three months
$
2,900,000

 
$
950,000

 
$
800,000

 
 
$
1,150,000

 
$

 
Off-balance sheet contractual obligations: (1)
 

 
 

 
 

 
 
 

 
 

 
Commitments to originate and purchase loans (2)
287,805

 
287,805

 

 
 

 

 
Commitments to fund unused lines of credit (3)
221,862

 
221,862

 

 
 

 

 
Total
$
3,409,667

 
$
1,459,667

 
$
800,000

 
 
$
1,150,000

 
$

 

(1)
Excludes contractual obligations related to operating lease commitments which have not changed significantly since December 31, 2016.
(2)
Includes commitments to originate loans held-for-sale of $9.5 million.
(3)
Includes commitments to fund commercial and industrial lines of credit of $152.1 million, home equity lines of credit of $39.0 million, and other consumer lines of credit of $30.8 million.

In addition to the contractual obligations previously discussed, we have liabilities for gross unrecognized tax benefits and interest and penalties related to uncertain tax positions which have not changed significantly from December 31, 2016 and are not included in the table above as the amounts and timing of their resolution

51


cannot be estimated.  For further information regarding these liabilities, see Note 11 of Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” in our 2016 Annual Report on Form 10-K.  Similarly, we have an obligation related to our investments in affordable housing limited partnerships totaling $12.0 million at March 31, 2017 which is not included in the table above as the timing of funding installments, which are due on an "as needed" basis, currently projected over the next two years, cannot be estimated. We also have contingent liabilities related to assets sold with recourse and standby letters of credit which have not changed significantly from December 31, 2016.

For further information regarding our off-balance sheet arrangements and contractual obligations, see Part II, Item 7, “MD&A,” in our 2016 Annual Report on Form 10-K.

Comparison of Financial Condition as of March 31, 2017 and December 31, 2016 and Operating Results for the Three Months Ended March 31, 2017 and 2016

Financial Condition

Total assets declined $216.0 million to $14.34 billion at March 31, 2017, from $14.56 billion at December 31, 2016, primarily attributable to a net decline in our loan portfolio. Loans receivable decreased $216.2 million to $10.20 billion at March 31, 2017, from $10.42 billion at December 31, 2016, and represented 71% of total assets at March 31, 2017. The decline in our mortgage loan portfolio reflects repayments of $427.5 million which were in excess of originations and purchases of $230.8 million during the three months ended March 31, 2017.

Our residential mortgage loan portfolio decreased $150.6 million to $5.21 billion at March 31, 2017, from $5.37 billion at December 31, 2016, and represented 51% of our total loan portfolio at March 31, 2017. Residential mortgage loan repayments outpaced our origination and purchase volume during the three months ended March 31, 2017, reflecting the low interest rate environment and our reduced emphasis on the origination and purchase of residential mortgage loans for portfolio. Residential mortgage loan originations and purchases for portfolio totaled $135.8 million during the three months ended March 31, 2017, of which $77.1 million were originations and $58.7 million were purchases. During the three months ended March 31, 2017, the loan-to-value ratio of our residential mortgage loan originations and purchases for portfolio, at the time of origination or purchase, averaged approximately 57% and the loan amount averaged approximately $561,000.

Our multi-family mortgage loan portfolio decreased $22.9 million to $4.02 billion at March 31, 2017, from $4.05 billion at December 31, 2016, and represented 40% of our total loan portfolio at March 31, 2017. Our commercial real estate mortgage loan portfolio decreased $28.4 million to $700.9 million at March 31, 2017 compared to $729.3 million at December 31, 2016 and represented 7% of our total loan portfolio at March 31, 2017. Multi-family and commercial real estate loan originations totaled $95.0 million during the three months ended March 31, 2017. During the three months ended March 31, 2017, our multi-family and commercial real estate mortgage loan originations reflected loan balances averaging approximately $2.3 million with a weighted average loan-to-value ratio, at the time of origination, of approximately 38% and a weighted average debt service coverage ratio of approximately 1.37.

Our securities portfolio increased $15.1 million to $3.04 billion at March 31, 2017 compared to $3.02 billion at December 31, 2016 and represented 21% of total assets at March 31, 2017. Purchases totaling $192.6 million were in excess of repayments and maturities of $175.4 million. At March 31, 2017, our securities portfolio was comprised primarily of fixed rate REMIC and CMO securities which had an amortized cost

52


of $2.32 billion, a weighted average current coupon of 2.66%, a weighted average collateral coupon of 3.99% and a weighted average life of 4.3 years.

Total liabilities declined $225.9 million to $12.62 billion at March 31, 2017, from $12.84 billion at December 31, 2016, primarily due to a decline in borrowings, partially offset by an increase in deposits.

Total borrowings, net, decreased $389.9 million to $3.24 billion at March 31, 2017, from $3.63 billion at December 31, 2016. The decrease in borrowings was due to a $390.0 million decrease in FHLB-NY advances.

Deposits totaled $8.99 billion at March 31, 2017, or 71% of total liabilities, an increase of $113.2 million compared to $8.88 billion at December 31, 2016. The increase in deposits reflected a net increase of $140.5 million in core deposits, partially offset by a decrease of $27.3 million in certificates of deposit. At March 31, 2017, core deposits totaled $7.42 billion and represented 82% of total deposits. The net increase in core deposits at March 31, 2017, compared to December 31, 2016, primarily reflected an increase of $74.7 million in money market accounts to $2.78 billion and an increase of $56.4 million in NOW and demand deposit accounts to $2.58 billion at March 31, 2017. The net increase in core deposits during the three months ended March 31, 2017 reflects our efforts to grow our core deposits, including our efforts to expand our business banking customer base, as well as customers' preference for the liquidity these types of deposits provide.

Stockholders' equity increased $9.9 million to $1.72 billion at March 31, 2017, from $1.71 billion at December 31, 2016. The increase in stockholders’ equity was primarily due to net income of $14.4 million and stock-based compensation of $1.7 million, partially offset by dividends on common and preferred stock totaling $6.2 million.


Results of Operations

General

Net income available to common shareholders for the three months ended March 31, 2017 decreased $4.2 million to $12.2 million, or $0.12 diluted EPS, compared to $16.4 million, or $0.16 diluted EPS, for the three months ended March 31, 2016. The decrease in net income available to common shareholders for the 2017 first quarter compared to the 2016 first quarter was primarily due to a decrease in net interest income and an increase in non-interest expense, partially offset by a decrease in income tax expense.

Return on average common stockholders’ equity decreased to 3.07% for the three months ended March 31, 2017, compared to 4.25% for the three months ended March 31, 2016. Return on average tangible common stockholders’ equity, which represents average common stockholders’ equity less average goodwill, decreased to 3.48% for the three months ended March 31, 2017, compared to 4.82% for the three months ended March 31, 2016. The decreases in the returns on average common stockholders’ equity and average tangible common stockholders’ equity were due to the decrease in net income available to common shareholders, coupled with the increase in average common stockholders’ equity for the three months ended March 31, 2017, compared to the three months ended March 31, 2016. Return on average assets was 0.40% for the three months ended March 31, 2017, compared to 0.49% the three months ended March 31, 2016.


53


Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid. Our net interest income is significantly impacted by changes in interest rates and market yield curves and their related impact on cash flows. See Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” for further discussion of the potential impact of changes in interest rates on our results of operations.

Net interest income decreased $3.2 million to $80.1 million for the three months ended March 31, 2017, compared to $83.3 million for the three months ended March 31, 2016, reflecting a decrease in our average balance sheet, partially offset by a slight increase in the net interest margin. The net interest rate spread for the three months ended March 31, 2017 was 2.28%, unchanged from the three months ended March 31, 2016. The net interest margin increased one basis points to 2.37% for the three months ended March 31, 2017, from 2.36% for the three months ended March 31, 2016. The decrease in net interest income reflected a decline in interest income, partially offset by a decline in interest expense. The decrease in interest income for the 2017 first quarter, compared to the 2016 first quarter, reflected a decline in the average balance of our residential mortgage loan and multi-family and commercial real estate mortgage loan portfolios as well as a decline in the average yield on multi-family and commercial real estate mortgage loans, partially offset by an increase in the average yield on residential mortgage loans and an increase in the average balance of mortgage-backed and other securities. The decrease in interest expense for the 2017 first quarter, compared to the same period a year ago, was primarily due to declines in the average balance of borrowings and certificates of deposit and a decline in the average cost of our certificates of deposit, partially offset by an increase in the average cost of borrowings. The average balance of net interest-earning assets increased $50.4 million to $1.19 billion for the three months ended March 31, 2017, from $1.14 billion for the three months ended March 31, 2016.

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

Analysis of Net Interest Income

The following table sets forth certain information about the average balances of our assets and liabilities and their related yields and costs for the periods indicated. Average yields are derived by dividing income by the average balance of the related assets and average costs are derived by dividing expense by the average balance of the related liabilities, for the periods shown. Average balances are derived from average daily balances. The yields and costs include amortization of fees, costs, premiums and discounts which are considered adjustments to interest rates.

54


 
For the Three Months Ended March 31,
 
2017
 
2016
(Dollars in Thousands)
Average
Balance
 
Interest
 
Average
Yield/
Cost
 
Average
Balance
 
Interest
 
Average
Yield/
Cost
 
 
 
 
 
(Annualized)
 
 
 
 
 
(Annualized)
Assets:
 

 
 

 
 
 

 
 
 

 
 

 
 
 

 
Interest-earning assets:
 

 
 

 
 
 

 
 
 

 
 

 
 
 

 
Mortgage loans (1):
 

 
 

 
 
 

 
 
 

 
 

 
 
 

 
Residential
$
5,335,844

 
$
44,060

 
 
3.30
%
 
 
$
5,961,860

 
$
47,375

 
 
3.18
%
 
Multi-family and commercial
real estate
4,745,176

 
43,406

 
 
3.66

 
 
4,878,436

 
46,805

 
 
3.84

 
Consumer and other loans (1)
233,042

 
2,292

 
 
3.93

 
 
253,518

 
2,372

 
 
3.74

 
Total loans
10,314,062

 
89,758

 
 
3.48

 
 
11,093,814

 
96,552

 
 
3.48

 
Mortgage-backed and other securities (2)
2,989,831

 
18,000

 
 
2.41

 
 
2,729,321

 
16,904

 
 
2.48

 
 Interest-earning cash accounts
119,036

 
161

 
 
0.54

 
 
162,233

 
120

 
 
0.30

 
FHLB-NY stock
116,811

 
1,794

 
 
6.14

 
 
132,896

 
1,421

 
 
4.28

 
Total interest-earning assets
13,539,740

 
109,713

 
 
3.24

 
 
14,118,264

 
114,997

 
 
3.26

 
Goodwill
185,151

 
 

 
 
 

 
 
185,151

 
 

 
 
 

 
Other non-interest-earning assets
713,627

 
 

 
 
 

 
 
743,391

 
 

 
 
 

 
Total assets
$
14,438,518

 
 

 
 
 

 
 
$
15,046,806

 
 

 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders’ equity:
 

 
 

 
 
 

 
 
 

 
 

 
 
 

 
Interest-bearing liabilities:
 

 
 

 
 
 

 
 
 

 
 

 
 
 

 
NOW and demand deposit (3)
$
2,500,385

 
$
201

 
 
0.03

 
 
$
2,375,285

 
$
195

 
 
0.03

 
Money market
2,754,002

 
1,887

 
 
0.27

 
 
2,608,009

 
1,765

 
 
0.27

 
Savings
2,048,919

 
252

 
 
0.05

 
 
2,125,860

 
265

 
 
0.05

 
Total core deposits
7,303,306

 
2,340

 
 
0.13

 
 
7,109,154

 
2,225

 
 
0.13

 
Certificates of deposit
1,585,512

 
4,019

 
 
1.01

 
 
1,904,346

 
5,237

 
 
1.10

 
Total deposits
8,888,818

 
6,359

 
 
0.29

 
 
9,013,500

 
7,462

 
 
0.33

 
Borrowings
3,458,473

 
23,239

 
 
2.69

 
 
3,962,709

 
24,283

 
 
2.45

 
Total interest-bearing liabilities
12,347,291

 
29,598

 
 
0.96

 
 
12,976,209

 
31,745

 
 
0.98

 
Non-interest-bearing liabilities
372,167

 
 

 
 
 

 
 
398,179

 
 

 
 
 

 
Total liabilities
12,719,458

 
 

 
 
 

 
 
13,374,388

 
 

 
 
 

 
Stockholders’ equity
1,719,060

 
 

 
 
 

 
 
1,672,418

 
 

 
 
 

 
Total liabilities and stockholders’ equity
$
14,438,518

 
 

 
 
 

 
 
$
15,046,806

 
 

 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income/
net interest rate spread (4)
 

 
$
80,115

 
 
2.28
%
 
 
 

 
$
83,252

 
 
2.28
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest-earning assets/
net interest margin (5)
$
1,192,449

 
 

 
 
2.37
%
 
 
$
1,142,055

 
 

 
 
2.36
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of interest-earning assets to
interest-bearing liabilities
1.10 x

 
 

 
 
 

 
 
1.09 x

 
 

 
 
 

 
__________________________________
(1)
Mortgage loans and consumer and other loans include loans held-for-sale and non-performing loans and exclude the allowance for loan losses.
(2)
Securities available-for-sale are included at average amortized cost.
(3)
NOW and demand deposit accounts include non-interest bearing accounts with an average balance of $1.06 billion for the three months ending March 31, 2017 and $1.00 billion for the three months ending March 31, 2016.
(4)
Net interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.
(5)
Net interest margin represents net interest income divided by average interest-earning assets.


55


Rate/Volume Analysis

The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated.  Information is provided in each category with respect to (1) the changes attributable to changes in volume (changes in volume multiplied by prior rate), (2) the changes attributable to changes in rate (changes in rate multiplied by prior volume), and (3) the net change.  The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
 
Increase (Decrease) for the
Three Months ended March 31, 2017
Compared to the
Three Months ended March 31, 2016
(In Thousands)
Volume
 
Rate
 
Net
Interest-earning assets:
 

 
 

 
 

Mortgage loans:
 

 
 

 
 

Residential
$
(5,070
)
 
$
1,755

 
$
(3,315
)
Multi-family and commercial real estate
(1,251
)
 
(2,148
)
 
(3,399
)
Consumer and other loans
(197
)
 
117

 
(80
)
Mortgage-backed and other securities
1,583

 
(487
)
 
1,096

Interest-earning cash accounts
(38
)
 
79

 
41

FHLB-NY stock
(188
)
 
561

 
373

Total
(5,161
)
 
(123
)
 
(5,284
)
Interest-bearing liabilities:
 

 
 

 
 

NOW and demand deposit
6

 

 
6

Money market
122

 

 
122

Savings
(13
)
 

 
(13
)
Certificates of deposit
(819
)
 
(399
)
 
(1,218
)
Borrowings
(3,277
)
 
2,233

 
(1,044
)
Total
(3,981
)
 
1,834

 
(2,147
)
Net change in net interest income
$
(1,180
)
 
$
(1,957
)
 
$
(3,137
)

Interest Income

Interest income decreased $5.3 million to $109.7 million for the three months ended March 31, 2017, from $115.0 million for the three months ended March 31, 2016, due to a decrease of $578.5 million in the average balance of interest-earning assets to $13.54 billion for the three months ended March 31, 2017, from $14.12 billion for the three months ended March 31, 2016, coupled with a decrease in the average yield on interest-earning assets to 3.24% for the three months ended March 31, 2017, from 3.26% for the three months ended March 31, 2016. The decrease in the average balance of interest-earning assets primarily reflects declines in the average balance of residential mortgage loans and multi-family and commercial real estate mortgage loans, partially offset by an increase in the average balance of mortgage-backed and other securities. The decrease in the average yield on interest-earning assets was primarily due to lower average yields on multi-family and commercial real estate mortgage loans and mortgage-backed and other securities, partially offset by an increase in the average yield on residential mortgage loans.

Interest income on residential mortgage loans decreased $3.3 million to $44.1 million for the three months ended March 31, 2017, from $47.4 million for the three months ended March 31, 2016, due to a decrease of $626.0 million in the average balance to $5.34 billion for the three months ended March 31, 2017, from $5.96 billion for the three months ended March 31, 2016, partially offset by an increase in the average yield

56


to 3.30% for the three months ended March 31, 2017, from 3.18% for the three months ended March 31, 2016. The decrease in the average balance of residential mortgage loans reflected the continued decline in this portfolio as repayments outpaced our originations over the past year. The increase in the average yield was primarily due to the impact of the upward repricing of our ARM loans, reflecting higher short-term market interest rates, offset by new originations at lower interest rates than the interest rates on loans repaid over the past year.

Interest income on multi-family and commercial real estate mortgage loans decreased $3.4 million to $43.4 million for the three months ended March 31, 2017, from $46.8 million for the three months ended March 31, 2016, due to a decrease in the average yield to 3.66% for the three months ended March 31, 2017, from 3.84% for the three months ended March 31, 2016, combined with a decrease of $133.3 million in the average balance to $4.75 billion for the three months ended March 31, 2017, from $4.88 billion for the three months ended March 31, 2016. The decrease in the average yield reflected new originations at interest rates below the weighted average interest rate of the portfolio and the interest rates on loans repaid, coupled with lower prepayment penalties collected. Prepayment penalties totaled $1.0 million for the three months ended March 31, 2017, compared to $2.0 million for the three months ended March 31, 2016. The decrease in the average balance of multi-family and commercial real estate loans was attributable to repayments outpacing originations over the past year.

Interest income on mortgage-backed and other securities increased $1.1 million to $18.0 million for the three months ended March 31, 2017, from $16.9 million for the three months ended March 31, 2016, due to an increase of $260.5 million in the average balance of the portfolio to $2.99 billion for the three months ended March 31, 2017, from $2.73 billion for the three months ended March 31, 2016, reflecting securities purchases over the past year in excess of repayments and sales, partially offset by a decrease in the average yield to 2.41% for the three months ended March 31, 2017, from 2.48% for the three months ended March 31, 2016.

Interest Expense

Interest expense decreased $2.1 million to $29.6 million for the three months ended March 31, 2017, from $31.7 million for the three months ended March 31, 2016, primarily due to a decrease of $628.9 million in the average balance of interest-bearing liabilities to $12.35 billion for the three months ended March 31, 2017, from $12.98 billion for the three months ended March 31, 2016, coupled with a slight decrease in the average cost of interest-bearing liabilities to 0.96% for the three months ended March 31, 2017, from 0.98% for the three months ended March 31, 2016. The decrease in the average balance of interest-bearing liabilities is primarily due to the decreases in the average balances of borrowings and certificates of deposit. The decrease in the average cost of interest-bearing liabilities primarily reflected a decrease in the average cost of certificates of deposit, partially offset by an increase in the average cost of borrowings.

Interest expense on total deposits decreased $1.1 million to $6.4 million for the three months ended March 31, 2017, from $7.5 million for the three months ended March 31, 2016, due to a decrease of $124.7 million in the average balance of total deposits to $8.89 billion for the three months ended March 31, 2017, from $9.01 billion for the three months ended March 31, 2016, coupled with a decrease in the average cost to 0.29% for the three months ended March 31, 2017, from 0.33% for the three months ended March 31, 2016. The decrease in the average balance of total deposits were primarily due to a decrease in the average balance of certificates of deposit, partially offset by an increase in the average balance of money market and NOW and demand deposit accounts. The decrease in the average balance of certificates of deposit and the increase in the average balance of money market and NOW and demand deposit accounts were reflective of our efforts to reposition the liability mix of our balance sheet to increase our core deposits and reduce certificates of

57


deposit. The decrease in the average cost of total deposits was due to the decrease in the average cost of certificates of deposit.

Interest expense on certificates of deposit decreased $1.2 million to $4.0 million for the three months ended March 31, 2017, from $5.2 million for the three months ended March 31, 2016, due to a decrease of $318.8 million in the average balance, coupled with a decrease in the average cost to 1.01% for the three months ended March 31, 2017, from 1.10% for the three months ended March 31, 2016. The decrease in the average cost of certificates of deposit reflects the impact of certificates of deposit at higher interest rates maturing and being replaced at lower interest rates during 2016.

Interest expense on borrowings decreased $1.1 million to $23.2 million for the three months ended March 31, 2017, from $24.3 million for the three months ended March 31, 2016, due to a decrease of $504.2 million in the average balance to $3.46 billion for the three months ended March 31, 2017, from $3.96 billion for the three months ended March 31, 2016, partially offset by an increase in the average cost to 2.69% for the three months ended March 31, 2017, from 2.45% for the three months ended March 31, 2016.

Provision for Loan Losses Credited to Operations

We review our allowance for loan losses on a quarterly basis. Material factors considered during our quarterly review are the composition and size of our loan portfolio, the levels and composition of delinquent and non-performing loans, our loss history and our evaluation of the housing and real estate markets and the current economic environment. We continue to closely monitor the local and national real estate markets and other factors related to risks inherent in our loan portfolio. We are impacted by both national and regional economic factors, with residential mortgage loans from various regions of the country held in our portfolio and our multi-family and commercial real estate mortgage loan portfolio concentrated in the New York metropolitan area.

We recorded a provision for loan losses credited to operations of $2.5 million for the three months ended March 31, 2017 compared to a provision for loan losses credited to operations of $3.1 million for the three months ended March 31, 2016. We had net loan charge-offs of $1.1 million for the three months ended March 31, 2017 compared to net loan charge-offs of $673,000 for the three months ended March 31, 2016. Our allowance for loan losses decreased to $82.5 million at March 31, 2017, representing 0.81% of total loans, compared to $86.1 million, or 0.83% of total loans, at December 31, 2016. We continue to maintain our allowance for loan losses at a level which we believe is appropriate given the contraction of the overall loan portfolio, as well as reductions in the balances of certain loan classes we believe bear higher risk, such as residential interest-only loans, residential mortgage loans originated prior to 2008 and multi-family and commercial real estate mortgage loans originated prior to 2011, and the quality of our loan originations.

For further discussion of the methodology used to determine the allowance for loan losses, see “Critical Accounting Policies-Allowance for Loan Losses” and for further discussion of our loan portfolio composition and non-performing loans, see “Asset Quality” and Note 4 of Notes to Consolidated Financial Statements (Unaudited) in Part I, Item 1, “Financial Statements (Unaudited).”


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Non-Interest Income

Non-interest income increased $473,000 to $11.9 million for the three months ended March 31, 2017, from $11.4 million for the three months ended March 31, 2016, primarily due to an increase in mortgage banking income (loss), net, partially offset by decreases in customer service fees and other non-interest income.

Mortgage banking income (loss), net, which includes loan servicing fees, net gain on sales of loans, amortization of MSR and valuation allowance adjustments for the impairment of MSR valuation, increased $1.3 million to net income of $1.3 million for the three months ended March 31, 2017, from a net loss of $37,000 for the three months ended March 31, 2016. The increase was primarily due to a net recovery of $215,000 recorded in the valuation allowance for the impairment of MSR for the three months ended March 31, 2017, compared to a net provision of $877,000 recorded for the three months ended March 31, 2016.

Customer service fees decreased $379,000 to $6.6 million for the three months ended March 31, 2017, from $7.0 million for the three months ended March 31, 2016, primarily due to the discontinuation of an inactivity fee charge in the third quarter of 2016, lower commission income on sales of annuity and insurance products and lower ATM fees.

Non-Interest Expense

Non-interest expense increased $2.5 million to $72.0 million for the three months ended March 31, 2017, from $69.5 million for the three months ended March 31, 2016, primarily due to an increase in other non-interest expense, partially offset by decreases in compensation and benefits expense and federal deposit insurance premium expense. Our percentage of general and administrative expense to average assets, annualized, was 1.99% for the three months ended March 31, 2017, compared to 1.85% for the three months ended March 31, 2016.

Other non-interest expense increased $5.0 million to $11.9 million for the three months ended March 31, 2017, compared to $6.9 million for the three months ended March 31, 2016, primarily due to a $4.0 million one-time charge associated with the recognition of the anticipated settlement cost related to lease obligations in connection with our residential mortgage operating facility. Our residential mortgage operations are being relocated to another existing Astoria facility.

Compensation and benefits decreased $1.3 million to $37.0 million for the three months ended March 31, 2017, compared to $38.3 million for the three months ended March 31, 2016, primarily due to lower headcount, partially offset by an increase in medical insurance premiums. Federal deposit insurance premium expense decreased $1.2 million to $2.3 million for the three months ended March 31, 2017, compared to $3.5 million for the three months ended March 31, 2016, primarily due to a reduction in our assessment rate and a reduction in our assessment base.

Income Tax Expense

For the three months ended March 31, 2017, income tax expense totaled $8.1 million, representing an effective tax rate of 36.0%, compared to income tax expense of $9.7 million, representing an effective tax rate of 34.3% for the three months ended March 31, 2016.



59


Asset Quality

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.

As a result of our continuing efforts to reposition the asset mix of our balance sheet, we have experienced increases in our multi-family and commercial real estate mortgage loan portfolio and declines in our residential mortgage loan portfolio over the past few years. Our multi-family mortgage loan portfolio represents 40% of our total loan portfolio at March 31, 2017, compared to 39% at December 31, 2016. In contrast, our residential mortgage loan portfolio decreased to represent 51% of our total loan portfolio at March 31, 2017, compared to 52% at December 31, 2016. At March 31, 2017 and December 31, 2016, our commercial real estate mortgage loan portfolio represented 7% of our total loan portfolio and the remaining 2% of our total portfolio was comprised of consumer and other loans.

We continue to adhere to prudent underwriting standards.  We underwrite our residential mortgage loans primarily based upon our evaluation of the borrower’s ability to pay.  We do not originate negative amortization loans, payment option loans or other loans with short-term interest-only periods.  Additionally, 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.  Interest-only loans in our portfolio 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. During the 2010 third quarter, we stopped offering interest-only loans.  At March 31, 2017, $1.40 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 $877.5 million of loans which converted pursuant to their contractual terms and $519.1 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, $81.7 million were non-performing at March 31, 2017, the majority of which converted pursuant to their contractual terms. Reduced documentation loans in our portfolio are comprised primarily stated income, full asset, or SIFA, loans.  To a lesser extent, reduced documentation loans in our portfolio also include stated income, stated asset, or SISA, loans.  During the 2007 fourth quarter, we stopped offering reduced documentation loans.


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The following table provides further details on the composition of our residential mortgage loan portfolio in dollar amounts and percentages of the portfolio at the dates indicated.
 
At March 31, 2017
 
At December 31, 2016
(Dollars in Thousands)
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
Residential mortgage loans:
 

 
 

 
 

 
 

Full documentation interest-only (1)
$
177,860

 
3.41
%
 
$
230,986

 
4.31
%
Full documentation amortizing (2)
4,335,894

 
83.15

 
4,402,605

 
82.05

Reduced documentation interest-only (1)(3)
68,091

 
1.31

 
99,561

 
1.86

Reduced documentation amortizing (3)(4)
632,925

 
12.13

 
632,211

 
11.78

Total residential mortgage loans
$
5,214,770

 
100.00
%
 
$
5,365,363

 
100.00
%

(1)
Includes interest-only hybrid ARM loans originated prior to 2007 which were underwritten at the initial note rate, which may have been a discounted rate, totaling $12.6 million at March 31, 2017 and $45.4 million at December 31, 2016.
(2)
Includes loans previously categorized as full documentation interest-only that have converted to full documentation amortizing status totaling $919.4 million at March 31, 2017 and $941.3 million at December 31, 2016.
(3)
Includes SISA loans totaling $109.3 million at March 31, 2017 and $114.8 million at December 31, 2016.
(4)
Includes loans previously categorized as reduced documentation interest-only that have converted to reduced documentation amortizing status totaling $477.1 million at March 31, 2017 and $471.8 million at December 31, 2016.

Non-Performing Assets

The following table sets forth information regarding non-performing assets at the dates indicated.
(Dollars in Thousands)
At March 31, 2017
 
At December 31, 2016
Non-performing loans (1) (2):
 
 

 
 
 
 

 
Mortgage loans:
 
 

 
 
 
 

 
Residential
 
$
125,559

 
 
 
$
133,994

 
Multi-family
 
3,705

 
 
 
4,381

 
Commercial real estate
 
6,595

 
 
 
5,336

 
Consumer and other loans
 
4,171

 
 
 
4,525

 
Total non-performing loans
 
140,030

 
 
 
148,236

 
REO, net (3)
 
13,500

 
 
 
15,144

 
Total non-performing assets
 
$
153,530

 
 
 
$
163,380

 
Non-performing loans to total loans
 
1.37
%
 
 
 
1.42
%
 
Non-performing loans to total assets
 
0.98

 
 
 
1.02

 
Non-performing assets to total assets
 
1.07

 
 
 
1.12

 
Allowance for loan losses to non-performing loans
 
58.92

 
 
 
58.08

 
Allowance for loan losses to total loans
 
0.81

 
 
 
0.83

 
_______________________________________________
(1)
Non-performing loans, substantially all of which are non-accrual loans, included loans modified in a TDR totaling $51.2 million at March 31, 2017 and $58.6 million at December 31, 2016. Non-performing loans exclude loans held-for-sale and loans which have been modified in a TDR that have been returned to accrual status.
(2)
Includes mortgage loans 90 days or more past due, primarily as to their maturity date but not their interest due, and still accruing interest totaling $1.6 million at March 31, 2017. There were no such loans at December 31, 2016.
(3)
REO, all of which were residential properties, is net of a valuation allowance of $1.4 million at March 31, 2017 and $1.2 million at December 31, 2016.

Total non-performing assets decreased $9.9 million to $153.5 million at March 31, 2017 compared to $163.4 million at December 31, 2016, due to a decrease in non-performing loans, coupled with a decrease in REO, net. The ratio of non-performing assets to total assets increased to 1.07% at March 31, 2017, compared to 1.12% at December 31, 2016, primarily due to the decrease in non-performing assets.


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Non-performing loans, which are comprised primarily of mortgage loans and exclude loans held-for-sale, decreased $8.2 million to $140.0 million at March 31, 2017, compared to $148.2 million at December 31, 2016. The ratio of non-performing loans to total loans was 1.37% at March 31, 2017, compared to 1.42% at December 31, 2016. The decrease in non-performing loans at March 31, 2017 compared to December 31, 2016 was primarily attributable to a decrease in non-performing residential mortgage loans. The changes in non-performing loans during any period are taken into account when determining the allowance for loan losses because the allowance coverage percentages related to our non-performing loans are generally higher than the allowance coverage percentages related to our performing loans. In evaluating our allowance coverage percentages for non-performing loans, we consider our aggregate historical loss experience with respect to the ultimate disposition of the underlying collateral. REO, net, decreased $1.6 million to $13.5 million at March 31, 2017, compared to $15.1 million at December 31, 2016, reflecting an excess of the volume of REO sold over the volume of loans that shifted from non-performing delinquent loans to REO through the completion of the foreclosure process during the three months ended March 31, 2017.

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 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 $51.2 million at March 31, 2017 and $58.6 million at December 31, 2016, of which $31.4 million at March 31, 2017 and $38.0 million at December 31, 2016 were current or less than 90 days past due. Loans modified in a TDR remain as non-performing loans in non-accrual status until we determine that future collection of principal and interest is reasonably assured. Restructured accruing loans totaled $84.4 million at March 31, 2017 and $84.1 million at December 31, 2016.

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 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 March 31, 2017 there was one commercial real estate mortgage loan for $5.1 million that was 30 days past maturity, where the borrower had the intent and ability to refinance, classified as current. At December 31, 2016 there was one multi-family mortgage loan for $1.2 million that was 30 days past

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maturity, where the borrower had the intent and ability to refinance, classified as current. Should a loan reach 60 days past maturity we then classify such loans as past due. At March 31, 2017 there was one commercial real estate mortgage loan for $521,000 that was 60 days past maturity. There were no loans 60 days past maturity at December 31, 2016. If all non-accrual loans at March 31, 2017 and 2016 had been performing in accordance with their original terms, we would have recorded interest income, with respect to such loans, of $1.5 million for the three months ended March 31, 2017 and 2016.  Actual payments recorded as interest income, with respect to such loans, totaled $462,000 for the three months ended March 31, 2017 and $607,000 for the three months ended March 31, 2016.

In addition to non-performing loans, we had $96.7 million of potential problem loans at March 31, 2017, including $69.8 million of residential mortgage loans and $26.4 million of multi-family and commercial real estate mortgage loans, compared to $99.5 million of potential problem loans at December 31, 2016, including $72.5 million of residential mortgage loans and $25.8 million of multi-family and commercial real estate mortgage loans. Such loans include loans 60-89 days past due and accruing interest and certain other internally adversely classified loans.

Non-performing residential mortgage loans continue to include a greater concentration of reduced documentation loans as compared to the entire residential mortgage loan portfolio. Reduced documentation loans represented only 13% of the residential mortgage loan portfolio, yet represented 46% of non-performing residential mortgage loans at March 31, 2017. The following table provides further details on the composition of our non-performing residential mortgage loans in dollar amounts and percentages of the portfolio, at the dates indicated.
 
At March 31, 2017
 
At December 31, 2016
(Dollars in Thousands)
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
Non-performing residential mortgage loans:
 

 
 

 
 

 
 

Full documentation interest-only
$
9,950

 
7.92
%
 
$
14,090

 
10.52
%
Full documentation amortizing
57,241

 
45.59

 
57,205

 
42.69

Reduced documentation interest-only
11,422

 
9.10

 
15,392

 
11.49

Reduced documentation amortizing
46,946

 
37.39

 
47,307

 
35.30

Total non-performing residential mortgage loans (1)
$
125,559

 
100.00
%
 
$
133,994

 
100.00
%

(1)
Includes $26.6 million of loans less than 90 days past due at March 31, 2017, of which $21.9 million were current, and includes $32.4 million of loans less than 90 days past due at December 31, 2016, of which $27.5 million were current.


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The following table provides details on the geographic composition of both our total and non-performing residential mortgage loans at March 31, 2017.
 
Residential Mortgage Loans
At March 31, 2017
(Dollars in Millions)
Total Loans
 
Percent of
Total Loans
 
Total
Non-Performing
Loans (1)
 
Percent of
Total
Non-Performing
Loans
 
Non-Performing
Loans
as Percent of
State Totals
State:
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
New York
 
$
1,607.3

 
 
 
30.8
%
 
 
 
$
14.1

 
 
 
11.2
%
 
 
 
0.88
%
 
Connecticut
 
488.8

 
 
 
9.4

 
 
 
15.6

 
 
 
12.4

 
 
 
3.19

 
Massachusetts
 
429.9

 
 
 
8.2

 
 
 
4.4

 
 
 
3.5

 
 
 
1.02

 
New Jersey
 
399.8

 
 
 
7.7

 
 
 
24.7

 
 
 
19.8

 
 
 
6.18

 
Virginia
 
397.3

 
 
 
7.6

 
 
 
12.7

 
 
 
10.1

 
 
 
3.20

 
Illinois
 
381.6

 
 
 
7.3

 
 
 
15.7

 
 
 
12.5

 
 
 
4.11

 
Maryland
 
341.9

 
 
 
6.6

 
 
 
19.5

 
 
 
15.5

 
 
 
5.70

 
California
 
276.9

 
 
 
5.3

 
 
 
8.6

 
 
 
6.8

 
 
 
3.11

 
Washington
 
216.4

 
 
 
4.1

 
 
 

 
 
 

 
 
 

 
Texas
 
119.5

 
 
 
2.3

 
 
 

 
 
 

 
 
 

 
All other states (2)(3)
 
555.4

 
 
 
10.7

 
 
 
10.3

 
 
 
8.2

 
 
 
1.85

 
Total
 
$
5,214.8

 
 
 
100.0
%
 
 
 
$
125.6

 
 
 
100.0
%
 
 
 
2.41
%
 

(1)
Includes $26.6 million of loans which were current or less than 90 days past due.
(2)
Includes 25 states and Washington, D.C.
(3)
Includes Florida with $81.4 million of total loans, of which $2.7 million were non-performing loans.

At March 31, 2017, substantially all of our multi-family and commercial real estate mortgage loans and all of our non-performing multi-family and commercial real estate mortgage loans were secured by properties located in the New York metropolitan area.


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Delinquent Loans

The following table shows a comparison of delinquent loans at the dates indicated.  Delinquent loans are reported based on the number of days the loan payments are past due.
 
 
30-59 Days
Past Due
 
 
60-89 Days
Past Due
 
 
90 Days or More
Past Due
(Dollars in Thousands)
Number
of
Loans
 
Amount
 
Number
of
Loans
 
Amount
 
Number
of
Loans
 
Amount
At March 31, 2017:
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

Mortgage loans:
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

Residential
 
192

 
 
$
61,640

 
 
49

 
 
$
16,106

 
 
307

 
 
$
98,979

Multi-family
 
24

 
 
5,599

 
 
4

 
 
547

 
 
10

 
 
558

Commercial real estate
 
3

 
 
2,375

 
 
1

 
 
521

 
 
2

 
 
2,266

Consumer and other loans
 
28

 
 
1,984

 
 
7

 
 
495

 
 
34

 
 
4,171

Total delinquent loans
 
247

 
 
$
71,598

 
 
61

 
 
$
17,669

 
 
353

 
 
$
105,974

Delinquent loans to total loans
 
 

 
 
0.70
%
 
 
 

 
 
0.17
%
 
 
 

 
 
1.04
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2016:
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

Mortgage loans:
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

Residential
 
240

 
 
$
72,445

 
 
59

 
 
$
18,314

 
 
315

 
 
$
101,563

Multi-family
 
17

 
 
1,488

 
 
5

 
 
1,406

 
 
12

 
 
1,244

Commercial real estate
 
3

 
 
2,262

 
 
2

 
 
1,298

 
 

 
 

Consumer and other loans
 
37

 
 
1,281

 
 
20

 
 
1,197

 
 
39

 
 
4,525

Total delinquent loans
 
297

 
 
$
77,476

 
 
86

 
 
$
22,215

 
 
366

 
 
$
107,332

Delinquent loans to total loans
 
 

 
 
0.74
%
 
 
 

 
 
0.21
%
 
 
 

 
 
1.03
%

Delinquent loans totaled $195.2 million at March 31, 2017, a decrease of $11.8 million compared to $207.0 million at December 31, 2016. The decrease in total delinquent loans at March 31, 2017 compared to December 31, 2016 includes a decrease of $15.6 million in delinquent residential mortgage loans, primarily in loans which were 30-59 days past due, partially offset by an increase of $4.2 million in delinquent multi-family and commercial real estate mortgage loans, primarily in loans which were 30-59 days past due.

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Allowance for Loan Losses

The following table summarizes activity in the allowance for loan losses.
 
For the Three Months Ended March 31,
(In Thousands)
 
2017
 
 
2016
 
Balance at January 1,
 
$
86,100

 
 
$
98,000

 
Provision credited to operations
 
(2,486
)
 
 
(3,127
)
 
Charge-offs:
 
 
 
 
 
 
Residential
 
(2,235
)
 
 
(1,665
)
 
Multi-family
 
(34
)
 
 
(310
)
 
Commercial real estate
 

 
 

 
Consumer and other loans
 
(112
)
 
 
(765
)
 
Total charge-offs
 
(2,381
)
 
 
(2,740
)
 
Recoveries:
 
 

 
 
 
 
Residential
 
1,048

 
 
954

 
Multi-family
 
39

 
 
1,043

 
Commercial real estate
 
109

 
 

 
Consumer and other loans
 
71

 
 
70

 
Total recoveries
 
1,267

 
 
2,067

 
Net charge-offs
 
(1,114
)
 
 
(673
)
 
Balance at March 31,
 
$
82,500

 
 
$
94,200

 

While ratio analyses are used as a supplemental tool for evaluating the overall reasonableness of the allowance for loan losses, the adequacy of the allowance for loan losses is ultimately determined by the actual losses and charges recognized in the portfolio. We update our loss analyses quarterly to ensure that our allowance coverage percentages are adequate and the overall allowance for loan losses is our best estimate of loss as of a particular point in time. Our 2017 first quarter analysis of loss severity on residential mortgage loans, defined as the ratio of net write-downs taken through disposition of the asset (typically the sale of REO or a short sale) to the loan’s original principal balance, indicated an average loss severity of approximately 27%, compared to approximately 30% in our 2016 fourth quarter analysis and approximately 27% in our 2016 first quarter analysis. Our analysis in the 2017 first quarter involved a review of residential REO sales and short sales which occurred during the 12 months ended December 31, 2016, and included both full documentation and reduced documentation loans in a variety of states with varying years of origination. Our 2017 first quarter analysis of charge-offs on multi-family and commercial real estate mortgage loans, which generally related to certain delinquent and non-performing loans transferred to held-for-sale and loans modified in a TDR during the 12 months ended December 31, 2016, indicated an average loss severity of approximately 11%, compared to approximately 17% in our 2016 fourth quarter analysis and approximately 29% in our 2016 first quarter analysis. We consider our average loss severity experience as a gauge in evaluating the overall adequacy of our allowance for loan losses. However, the uniqueness of each multi-family and commercial real estate loan, particularly multi-family loans within New York City, many of which are rent stabilized, is also factored into our analyses. We also consider the growth in our multi-family and commercial real estate mortgage loan portfolio in evaluating the adequacy of the allowance for loan losses. The ratio of the allowance for loan losses to non-performing loans was approximately 59% at March 31, 2017, which exceeds our average loss severity experience for our mortgage loan portfolios, supporting our determination that our allowance for loan losses is adequate to cover potential losses.



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ITEM 3.    Quantitative and Qualitative Disclosures about Market Risk

As a financial institution, the primary component of our market risk is interest rate risk.  The objective of our interest rate risk management policy is to maintain an appropriate mix and level of assets, liabilities and off-balance sheet items to enable us to meet our earnings and/or growth objectives, while maintaining specified minimum capital levels as required by our primary banking regulator and as established by our Board of Directors.  We use a variety of analyses to monitor, control and adjust our asset and liability positions, primarily interest rate sensitivity gap analysis, or gap analysis, and net interest income sensitivity analysis.  Additional interest rate risk modeling is done by Astoria Bank in conformity with regulatory requirements.


Gap Analysis

Gap analysis measures the difference between the amount of interest-earning assets anticipated to mature or reprice within specific time periods and the amount of interest-bearing liabilities anticipated to mature or reprice within the same time periods.  Gap analysis does not indicate the impact of general interest rate movements on our net interest income because the actual repricing dates of various assets and liabilities will differ from our estimates and it does not give consideration to the runoff and repricing rates of the assets and liabilities. In addition to the foregoing, the exercise of embedded call options modeled in the Gap analysis may differ from actual experience.

The following table, referred to as the Gap Table, sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at March 31, 2017 that we anticipate will reprice or mature in each of the future time periods shown using certain assumptions based on our historical experience and other market-based data available to us.  The Gap Table includes $1.95 billion of borrowings, which are callable within the next three months and on a quarterly basis thereafter, of which $1.15 billion are classified according to their projected call dates primarily in the one year to three years category and $800 million are classified according to their maturity dates in the more than one year to three years category. In addition, the Gap Table includes callable securities with an amortized cost of $374.3 million, all of which are callable in 2017 and at various times thereafter, classified according to their maturity dates substantially in the more than five years category. The classification of callable borrowings and securities according to their maturity or projected call dates is based on the market value analytics of our interest rate risk model.  As indicated in the Gap Table, our one-year interest rate sensitivity gap at March 31, 2017 was positive 7.38% compared to positive 5.06% at December 31, 2016, resulting in part from a reduction in short-term borrowings.

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At March 31, 2017
(Dollars in Thousands)
One Year
or Less
 
More than
One Year
to
Three Years
 
More than
Three Years
to
Five Years
 
More than
Five Years
 
Total
Interest-earning assets:
 

 
 

 
 

 
 

 
 

Mortgage loans (1)
$
4,074,870

 
$
2,614,136

 
$
1,378,467

 
$
1,805,429

 
$
9,872,902

Consumer and other loans (1)
188,455

 
19,239

 
10,408

 
4,387

 
222,489

Interest-earning cash accounts
109,972

 

 

 

 
109,972

Securities available-for-sale (2)
46,087

 
42,140

 
31,282

 
149,253

 
268,762

Securities held-to-maturity
318,260

 
466,207

 
352,370

 
1,632,539

 
2,769,376

FHLB-NY stock

 

 

 
107,166

 
107,166

Total interest-earning assets
4,737,644

 
3,141,722

 
1,772,527

 
3,698,774

 
13,350,667

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

Savings
295,735

 
390,443

 
281,174

 
1,090,299

 
2,057,651

Money market
1,390,777

 
834,396

 
556,382

 

 
2,781,555

NOW and demand deposit
100,082

 
240,951

 
215,337

 
2,021,089

 
2,577,459

Certificates of deposit
597,788

 
607,958

 
367,836

 

 
1,573,582

Borrowings, net (3)
1,294,885

 
1,850,000

 
100,000

 

 
3,244,885

Total interest-bearing liabilities
3,679,267

 
3,923,748

 
1,520,729

 
3,111,388

 
12,235,132

Interest rate sensitivity gap
1,058,377

 
(782,026
)
 
251,798

 
587,386

 
$
1,115,535

Cumulative interest rate sensitivity gap
$
1,058,377

 
$
276,351

 
$
528,149

 
$
1,115,535

 
 

 
 
 
 
 
 
 
 
 
 
Cumulative interest rate sensitivity gap as a
percentage of total assets
7.38
 %
 
1.93
 %
 
3.68
 %
 
7.78
 %
 
 

Cumulative net interest-earning assets as a
percentage of interest-bearing liabilities
128.77
 %
 
103.63
 %
 
105.79
 %
 
109.12
 %
 
 
_______________________________________________
(1)
Mortgage loans and consumer and other loans include loans held-for-sale and exclude non-accrual loans, except non-accrual residential mortgage loans which are current or less than 90 days past due, and the allowance for loan losses.
(2)
At amortized cost.
(3)
Classified according to projected repricing, maturity or call date.



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Net Interest Income Sensitivity Analysis

In managing interest rate risk, we also use an internal income simulation model for our net interest income sensitivity analyses.  These analyses measure changes in projected net interest income over various time periods resulting from hypothetical changes in interest rates.  The interest rate scenarios most commonly analyzed reflect gradual and reasonable changes over a specified time period, which is typically one or two years.  The base net interest income projection utilizes assumptions similar to those reflected in the Gap Table, assumes that cash flows are reinvested in similar assets and liabilities and that interest rates as of the reporting date remain constant over the projection period.  For each alternative interest rate scenario, corresponding changes in the forecasted cash flows and repricing characteristics of each financial instrument, consisting of all our interest-earning assets and interest-bearing liabilities are made to determine the impact on net interest income.

We perform analyses of interest rate increases and decreases of up to 400 basis points (when reasonably practical) over various time horizons although changes in interest rates of 200 basis points over a one year horizon is a more common and reasonable scenario for analytical purposes. Assuming the entire yield curve was to increase 200 basis points, through quarterly parallel increments of 50 basis points, our projected net interest income for the 12 month period beginning April 1, 2017 would decrease by approximately 2.01% from the base projection. At December 31, 2016, in the up 200 basis point scenario, our projected net interest income for the 12 month period beginning January 1, 2017 would have decreased by approximately 3.01% from the base projection. The current low interest rate environment prevents us from performing an income simulation for a decline in interest rates of the same magnitude and timing as our rising interest rate simulation, since certain asset yields, liability costs and related indices are below 2.00%. However, assuming the entire yield curve was to decrease 100 basis points through quarterly parallel decrements of 25 basis points, subject to floors, that have been established based on historical observation, our projected net interest income for the 12 month period beginning April 1, 2017 would decrease by approximately 1.94% from the base projection. At December 31, 2016, in the down 100 basis point scenario, our projected net interest income for the 12 month period beginning January 1, 2017 would have decreased by approximately 1.75% from the base projection.

Various shortcomings are inherent in both gap analyses and net interest income sensitivity analyses.  Certain assumptions may not reflect the manner in which actual yields and costs respond to market changes.  Similarly, prepayment estimates and similar assumptions are subjective in nature, involve uncertainties and, therefore, cannot necessarily be determined with precision.  Changes in interest rates may also affect our operating environment and operating strategies as well as those of our competitors.  Accordingly, although our net interest income sensitivity analyses may provide an indication of our interest rate risk exposure, such analyses may not provide a precise forecast of the effect of changes in market interest rates on our net interest income and our actual results may differ.  Additionally, certain assets, liabilities and items of income and expense which may be affected by changes in interest rates, albeit to a much lesser degree, and which do not affect net interest income, are excluded from this analysis.  These include income from bank owned life insurance and changes in the fair value of MSR.  With respect to these items alone, and assuming the entire yield curve was to increase 200 basis points, through quarterly parallel increments of 50 basis points, our projected net income for the 12 month period beginning April 1, 2017 would increase by approximately $2.9 million.  Conversely, assuming the entire yield curve was to decrease 100 basis points, through quarterly parallel decrements of 25 basis points, our projected net income for the 12 month period beginning April 1, 2017 would decrease by approximately $2.6 million with respect to these items alone.


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For further information regarding our market risk and the limitations of our gap analysis and net interest income sensitivity analysis, see Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” included in our 2016 Annual Report on Form 10-K.

ITEM 4.    Controls and Procedures

Monte N. Redman, our President and Chief Executive Officer, and Frank E. Fusco, our Senior Executive Vice President and Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of March 31, 2017.  Based upon their evaluation, they each found that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal controls over financial reporting that occurred during the three months ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II - OTHER INFORMATION

ITEM 1.    Legal Proceedings

In the ordinary course of our business, we are routinely made a defendant in or a party to pending or threatened legal actions or proceedings which, in some cases, seek substantial monetary damages from or other forms of relief against us.  In our opinion, after consultation with legal counsel, we believe it unlikely that such actions or proceedings will have a material adverse effect on our financial condition, results of operations or liquidity.

NYCB Merger-related Litigation
Following the announcement of the execution of the NYCB Merger Agreement six lawsuits challenging the proposed merger with NYCB, or the NYCB Merger, were filed in the Supreme Court of the State of New York, County of Nassau. These actions are captioned: (1) Sandra E. Weiss IRA v. Chrin, et al., Index No. 607132/2015 (filed November 4, 2015); (2) Raul v. Palleschi, et al., Index No. 607238/2015 (filed November 6, 2015); (3) Lowinger v. Redman, et al., Index No. 607268/2015 (filed November 9, 2015); (4) Minzer v. Astoria Fin. Corp., et al., Index No. 607358/2015 (filed November 12, 2015); (5) MSS 12-09 Trust v. Palleschi, et al., Index No. 607472/2015 (filed November 13, 2015); and (6) The Firemen’s Retirement System of St. Louis v. Keegan, et al., Index No. 607612/2015 (filed November 23, 2015). On January 15, 2016, the court consolidated the New York lawsuits under the caption In re Astoria Financial Corporation Shareholders Litigation, Index No. 607132/2015, and on January 29, 2016 the lead plaintiffs filed an amended consolidated complaint.  In addition, a seventh lawsuit was filed challenging the proposed transaction in the Delaware Court of Chancery, captioned O’Connell v. Astoria Financial Corp., et al., Case No. 11928 (filed January 22, 2016). The plaintiff in this case voluntarily dismissed the case on September 26, 2016. Each of the lawsuits is a putative class action filed on behalf of the stockholders of Astoria and names as defendants Astoria, its directors and NYCB, or collectively, the defendants. The NYCB Merger Agreement was terminated effective January 1, 2017.

On February 23, 2017, in light of the termination of the NYCB Merger Agreement, the defendants and the plaintiffs agreed to voluntarily discontinue the consolidated lawsuits without prejudice and without any costs

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to any party. For additional information regarding the NYCB Merger-related litigation, see Part I, Item 3, “Legal Proceedings,” in our 2016 Annual Report on Form 10-K.

Sterling Merger-related Litigation
Following the announcement of the execution of the Sterling Merger Agreement, a number of lawsuits challenging the proposed Sterling Merger were filed: (1) MSS 1209 Trust v. Astoria Financial Corporation, et al, Index No. 602161/2017, filed March 13, 2017 in the Supreme Court of the State of New York, County of Nassau, or the MSS Complaint; (2) Parshall v. Astoria Financial Corporation, et al, Case No. 2:17-cv-02165, filed April 10, 2017 in the United States District Court for the Eastern District of New York, or the Parshall Complaint; (3) Minzer v. Astoria Financial Corporation, et al., Case No. 2017-0284, filed April 12, 2017 in the Court of Chancery of the State of Delaware, or the Minzer Complaint; (4) O’Connell v. Astoria Financial Corporation, et al., Index No. 603703/2017, filed April 28, 2017 in the Supreme Court of the State of New York, County of Nassau, or the O’Connell Complaint, and together with the MSS Complaint and the Minzer Complaint, the State Court Complaints; and (5) Jenkins v. Astoria Financial Corporation, et al., filed May 2, 2017 in the United States District Court for the Eastern District of New York, or the Jenkins Complaint, and together with the Parshall Complaint, the Federal Complaints. Each of these lawsuits is a putative class action filed on behalf of stockholders of Astoria and names as defendants Astoria, its directors and Sterling.

The State Court Complaints generally allege that the directors of Astoria breached their fiduciary duties in connection with their approval of the Sterling Merger Agreement because they failed to properly value Astoria and to take steps to maximize value to Astoria’s public stockholders, resulting in inadequate merger consideration. The State Court Complaints further variously allege that the directors of Astoria approved the Sterling Merger through a flawed sales process, alleging the absence of a competitive sales process and that the process was tainted by certain alleged conflicts of interest on the part of the Astoria directors. The State Court Complaints also allege that the directors of Astoria breached their fiduciary duties because they agreed to unreasonable deal protection devices that allegedly preclude other bidders from making a successful competing offer for Astoria, including, among others, a no solicitation provision that allegedly prevents other buyers from participating in discussions which may lead to a superior proposal, a recurring and unlimited information rights provision, which allegedly gives Astoria 24 hours to provide Sterling unfettered access to confidential, non-public information about competing proposals from third parties, and a provision that requires Astoria to pay Sterling a termination fee of $75.7 million under certain circumstances. The State Court Complaints further allege that Sterling aided and abetted the alleged fiduciary breaches by the Astoria Board of Directors.

The Federal Complaints variously allege that the defendants violated federal securities laws by disseminating a registration statement that omits material information with respect to the Sterling Merger, including because it allegedly omits material information regarding Astoria’s and Sterling’s financial projections and financial analyses performed by their respective financial advisors, as well as material information regarding the process leading to the proposed Sterling Merger. The O’Connell Complaint and the Minzer Complaint also allege that the registration statement is materially misleading.

Plaintiffs in the state and federal actions seek, among other things, an order enjoining completion of the proposed Sterling Merger, additional disclosure, rescission of the transaction or rescissory damages if the Sterling Merger is consummated, and an award of costs and attorneys’ fees.

In addition, on April 26, 2017, a lawsuit challenging the proposed Sterling Merger was filed in the Supreme Court of the State of New York, County of Rockland, Garfield v. Sterling Bancorp, et al, Index No. 031888/2017. This lawsuit is also a putative class action, but was brought on behalf of the stockholders of

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Sterling and names Sterling, its directors, and Astoria as defendants. The complaint alleges, among other things, that Astoria has aided and abetted a breach of the Sterling directors’ fiduciary duty of candor by jointly filing a materially deficient and misleading proxy statement. The complaint states that plaintiffs are seeking an order, requiring, among other things, the defendants to cause Sterling to make corrective and complete disclosures on the proxy statement, or enjoinment and unwinding of the proposed Sterling Merger Agreement if they do not, and an award of rescissory and other damages to plaintiffs, including attorneys’ fees and costs.

The defendants believe these actions are without merit. Accordingly, no liability or reserve has been recognized in our consolidated statement of financial condition at March 31, 2017 with respect to these matters.

Other potential plaintiffs may file additional lawsuits challenging the proposed Sterling Merger. The outcome of the pending and any additional future litigation is uncertain. If the cases are not resolved, these lawsuits could result in substantial costs to Astoria, including any costs associated with the indemnification of Astoria’s directors and officers. No assurance can be given at this time that the litigation against us will be resolved in our favor, that this litigation will not be costly to defend, that this litigation will not have an impact on our financial condition or results of operations or that, ultimately, any such impact will not be material.


ITEM 1A.    Risk Factors

For a summary of risk factors relevant to our operations, see Part I, Item 1A, “Risk Factors,” in our 2016 Annual Report on Form 10-K.  There were no material changes in risk factors relevant to our operations since December 31, 2016, except as discussed below.

Astoria Financial Corporation will be subject to business uncertainties and contractual restrictions while the Sterling Merger is pending.

Uncertainty about the effect of the Sterling Merger on employees and customers may have an adverse effect on Astoria. These uncertainties may impair Astoria’s ability to attract, retain and motivate key personnel until the Sterling Merger is completed, and could cause customers and others that deal with Astoria to seek to change existing business relationships with Astoria. Retention of certain employees may be challenging while the Sterling Merger is pending, as certain employees may experience uncertainty about their future roles. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the business, Astoria’s business could be harmed. In addition, the Sterling Merger Agreement restricts Astoria from making certain acquisitions and taking other specified actions without the consent of Sterling. These restrictions may prevent Astoria from pursuing attractive business opportunities that may arise prior to the completion of the Sterling Merger. Furthermore, the terms of the Sterling Merger Agreement limit our ability to pay quarterly cash dividends in excess of $0.04 per share of our common stock without the consent of Sterling. Sterling has agreed not to unreasonably withhold any such consent.

The Sterling Merger Agreement limits Astoria’s ability to pursue acquisition proposals and requires Astoria to pay a termination fee of $75.7 million under limited circumstances, including circumstances relating to acquisition proposals. Additionally, certain provisions of the Astoria charter and bylaws may deter potential acquirers.

The Sterling Merger Agreement prohibits Astoria from initiating, soliciting, knowingly encouraging, or knowingly facilitating certain third-party acquisition proposals. The Sterling Merger agreement also provides that Astoria will be required to pay a termination fee in the amount of $75.7 million in the event that the

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Sterling Merger agreement is terminated under certain circumstances, including a change of recommendation by Astoria’s Board of Directors. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of Astoria from considering or proposing such an acquisition. Under the Astoria charter, certain business combinations involving affiliates or interested stockholders require the approval of a supermajority of stockholders unless they are approved by a majority of the disinterested directors on the Board of Directors or certain other requirements are met, and the Astoria charter generally prohibits holders of shares that are beneficially owned by a person who beneficially owns more than 10% of the outstanding shares of Astoria Common Stock, as applicable, from voting shares in excess of such 10% limit. These provisions and other provisions of the Astoria charter or bylaws, including provisions regarding Astoria’s classified Board of Directors, or of Delaware General Corporation Law, could make it more difficult for a third-party to acquire control of Astoria and may discourage a potential competing acquirer.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the Sterling Merger.

Before the Sterling Merger and the Sterling Bank Merger may be completed, Sterling and Astoria must obtain approvals from the FRB and the OCC. Other approvals, waivers or consents from regulators may also be required. In determining whether to grant these approvals, the regulators consider a variety of factors, including the regulatory standing of each party. An adverse development in either party’s regulatory standing or other factors could result in an inability to obtain these approvals or delay their receipt. The regulators may impose conditions on the completion of the Sterling Merger or the Sterling Bank Merger or require changes to the terms of the Sterling Merger or the Sterling Bank Merger. Such conditions or changes could have the effect of delaying or preventing completion of the Sterling Merger or the Sterling Bank Merger or imposing additional costs on or limiting the revenues of the combined company following the Sterling Merger or the Sterling Bank Merger, any of which might have an adverse effect on the combined company following the Sterling Merger.

The processing time for obtaining regulatory approvals for bank mergers, particularly for larger institutions, has increased since the financial crisis. In a recent approval order, the FRB stated that if material weaknesses are identified by examiners before a banking organization applies to engage in expansionary activity, the FRB will not in the future allow the application to remain pending while the banking organization addresses its weaknesses. The FRB explained that, in the future, if issues arise during the processing of an application, it will require the applicant banking organization to withdraw its application pending resolution of any supervisory concerns. Accordingly, if there is an adverse development in either party’s regulatory standing, Sterling may be required to withdraw some or all of the applications for approval of the Sterling Merger and Sterling Bank Merger and, if possible, resubmit them after the applicable supervisory concerns have been resolved.

The Sterling Merger Agreement may be terminated in accordance with its terms and the Sterling Merger may not be completed.

The Sterling Merger Agreement is subject to a number of conditions that must be fulfilled in order to complete the Sterling Merger. These conditions to the closing of the Sterling Merger may not be fulfilled in a timely manner or at all, and, accordingly, the Sterling Merger may be delayed or may not be completed. In addition, if the Sterling Merger is not completed by May 31, 2018, either Astoria or Sterling may choose not to proceed with the merger, and the parties can mutually decide to terminate the Sterling Merger Agreement at any time.

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In addition, Sterling and Astoria may elect to terminate the Sterling Merger Agreement in certain other circumstances and Astoria may be required to pay a termination fee.

Termination of the Sterling Merger Agreement could negatively impact Astoria Financial Corporation.

If the Sterling Merger Agreement is terminated, Astoria’s business may be adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Sterling Merger. In addition, if the Sterling Merger Agreement is terminated, the market price of Astoria Common Stock could decline to the extent that the current market price reflects a market assumption that the Sterling Merger will be completed. If the Sterling Merger Agreement is terminated and Astoria’s Board of Directors seeks another merger or business combination, Astoria’s stockholders cannot be certain that Astoria will be able to find a party willing to offer equivalent or more attractive consideration than the consideration Sterling has agreed to provide in the Sterling Merger. If the Sterling Merger Agreement is terminated under certain circumstances, Astoria may be required to pay a termination fee of $75.7 million to Sterling.

If the Sterling Merger is not completed, Astoria Financial Corporation will have incurred substantial expenses without realizing the expected benefits of the Sterling Merger.

Astoria has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Sterling Merger Agreement. If the Sterling Merger is not completed, Astoria would have to recognize these expenses without realizing the expected benefits of the Sterling Merger.

Pending Litigation Against Sterling and Astoria Could Result in an Injunction Preventing the Completion of the Merger.

Following the announcement of the execution of the Sterling Merger Agreement, four lawsuits challenging the proposed Sterling Merger were filed in state courts of New York and Delaware and in a federal district court in New York. Each of the lawsuits is a putative class action filed on behalf of the stockholders of Astoria and names as defendants Astoria, its directors and Sterling. These lawsuits seek, among other things, to enjoin completion of the Sterling Merger, damages, additional disclosures and an award of costs and attorneys’ fees. Additional plaintiffs may also file lawsuits against Astoria or Sterling and/or their directors and officers in connection with the Sterling Merger. The outcome of any such litigation is uncertain. If the cases are not resolved, these lawsuits could prevent or delay completion of the Sterling Merger and result in substantial costs to Astoria, including any costs associated with the indemnification of directors and officers. One of the conditions to the closing of the Sterling Merger is that no order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Sterling Merger shall be in effect. As such, if plaintiffs are successful in obtaining an injunction prohibiting the completion of the Sterling Merger on the agreed-upon terms, then such injunction may prevent the Sterling Merger from being completed, or from being completed within the expected timeframe. No assurance can be given at this time that the litigation against us will be resolved in our favor, that this litigation will not be costly to defend, that this litigation will not have an impact on our financial condition or results of operations or that, ultimately, any such impact will not be material. For additional information regarding the lawsuits, see Part II, Item 1, “Legal Proceedings.”

Because the market price of Sterling Common Stock will fluctuate, Astoria common stockholders cannot be certain of the market value of the merger consideration they will receive in the Sterling Merger.

Upon completion of the Sterling Merger, each outstanding share of Astoria Common Stock (except for specified shares of Astoria Common Stock held by Astoria or Sterling) will be converted into 0.875 shares

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of Sterling Common Stock. The market value of the merger consideration will vary from the closing price of Sterling Common Stock on the date Sterling and Astoria announced the Sterling Merger, on the date that the joint proxy statement/prospectus relating to the Sterling Merger is mailed to Astoria common stockholders, on the date of the special meeting of the Astoria common stockholders at which such stockholders must decide whether to adopt the Sterling Merger Agreement, and on the date the Sterling Merger is completed. Any change in the market price of Sterling Common Stock prior to the completion of the Sterling Merger will affect the market value of the merger consideration that Astoria common stockholders will receive upon completion of the Sterling Merger, and there will be no adjustment to the merger consideration for changes in the market price of either shares of Sterling Common Stock or shares of Astoria Common Stock. The market price of Sterling Common Stock could be subject to significant fluctuations due to a variety of factors, including: changes in sentiment in the market regarding Sterling’s operations or business prospects, including market sentiment regarding Sterling’s entry into the Sterling Merger Agreement, general market and economic conditions, changes in Sterling’s businesses, operations and prospects and regulatory considerations. Astoria common stockholders should obtain current stock quotations for shares of Sterling Common Stock and for shares of Astoria Common Stock.


ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Our twelfth stock repurchase plan, approved by our Board of Directors on April 18, 2007, authorized the purchase of 10,000,000 shares, or approximately 10% of our common stock then outstanding, in open-market or privately negotiated transactions.  At March 31, 2017, a maximum of 7,566,693 shares may yet be purchased under this plan.  Pursuant to the terms of the Sterling Merger Agreement, we may not repurchase shares of our common stock without the consent of Sterling. Sterling has agreed not to unreasonably withhold any such consent.


ITEM 3.    Defaults Upon Senior Securities

Not applicable.


ITEM 4.    Mine Safety Disclosures

Not applicable.


ITEM 5.    Other Information

Not applicable.


ITEM 6.    Exhibits

See Index of Exhibits on page 77.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
 
 
Astoria Financial Corporation
 
 
 
 
 
 
 
 
 
 
 
 
Dated:
May 5, 2017
 
By:
/s/
Monte N. Redman
 
 
 
 
 
Monte N. Redman
 
 
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
 
Dated:
May 5, 2017
 
By:
/s/
Frank E. Fusco
 
 
 
 
 
Frank E. Fusco
 
 
 
 
 
Senior Executive Vice President and
 
 
 
 
 
Chief Financial Officer
 
 
 
 
 
(Principal Accounting Officer)
 
 
 
 
 
 
 
 
 
 
 
 
Dated:
May 5, 2017
 
By:
/s/
John F. Kennedy
 
 
 
 
 
John F. Kennedy
 
 
 
 
 
Senior Vice President and
 
 
 
 
 
Chief Accounting Officer

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ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX OF EXHIBITS

Exhibit No.
 
Identification of Exhibit
 
 
 
2.1
 
Agreement and Plan of Merger by and between Astoria Financial Corporation and Sterling Bancorp, dated March 6, 2017. (1)
 
 
 
31.1
 
Certifications of Chief Executive Officer. (*)
 
 
 
31.2
 
Certifications of Chief Financial Officer. (*)
 
 
 
32.1
 
Written Statement of Chief Executive Officer and Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. (*)
 
 
 
101.INS
 
XBRL Instance Document (*)
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document (*)
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document (*)
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document (*)
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document (*)
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document (*)

(*)    Filed herewith
(1)
Incorporated by reference to Astoria Financial Corporation’s Current Report on Form 8-K, dated March 6, 2017, filed with the Securities and Exchange Commission on March 9, 2017 (File Number 001-11967).


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