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10-K 1 af2015123110k.htm 10-K 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-K
 
 
(Mark One)
[X]
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For the fiscal year ended December 31, 2015
 
 
[  ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number  001-11967
ASTORIA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
 
 
11-3170868
(State or other jurisdiction of incorporation or organization)
 
 
 
(I.R.S. Employer Identification Number)
One Astoria Bank Plaza, Lake Success, New York
 
11042-1085
 
(516) 327-3000
(Address of principal executive offices)
 
(Zip code)
 
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
Depositary Shares, each representing a 1/40th interest in a share of 6.50% Non-Cumulative Perpetual Preferred Stock, Series C
 


New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 
YES   X      NO       
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. 
YES             NO    X  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES    X       NO       
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
YES    X       NO       
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      X   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer    X   Accelerated Filer        Non-accelerated filer        Smaller reporting company       
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES        NO   X  
The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2015, based on the closing price for a share of the registrant’s Common Stock on that date as reported by the New York Stock Exchange, was $1.35 billion .
The number of shares of the registrant’s Common Stock outstanding as of February 16, 2016 was 101,404,957 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be utilized in connection with the 2016 Annual Meeting of Stockholders or any amendments to this Form 10-K, which will be filed with the Securities and Exchange Commission within 120 days from December 31, 2015 , are incorporated by reference into Part  III.



ASTORIA FINANCIAL CORPORATION
2015 ANNUAL REPORT ON FORM 10-K
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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

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

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

the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond our control;
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 the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Reform Act, and any actions regarding foreclosures;
enhanced supervision and examination by the Office of the Comptroller of the Currency, or OCC, the Board of Governors of the Federal Reserve System, or the FRB, and the Consumer Financial Protection Bureau, or CFPB;
effects of changes in existing U.S. government or government-sponsored mortgage programs;
our ability to successfully implement technological changes;
our ability to successfully consummate new business initiatives;
litigation or other matters before regulatory agencies, whether currently existing or commencing in the future;
our ability to implement enhanced risk management policies, procedures and controls commensurate with shifts in our business strategies and regulatory expectations;
the actual results of our proposed merger with and into New York Community Bancorp, Inc. 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 merger agreement could be terminated under certain circumstances;
the potential impact of the announcement of the proposed merger with and into New York Community Bancorp, Inc. on relationships with third parties, including customers, employees and competitors; and
delays in closing the merger with and into New York Community Bancorp, Inc.

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



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PART I
 
As used in this Form 10-K, “Astoria,” “we,” “us” and “our” refer to Astoria Financial Corporation and its consolidated subsidiaries, principally Astoria Bank, formerly known as Astoria Federal Savings and Loan Association.
 
ITEM 1.
BUSINESS

General

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

Astoria Bank was established in 1888 as a local, community-oriented bank that delivered exceptional service, a core philosophy that remains our focus today. Since inception, we operated on a simple business model of providing residential mortgage loans funded primarily by retail deposits of the customers that live and work near our branch franchise. In 2011, we set forth on developing plans to transform our balance sheet, both the asset side and the liability side, through the expansion of the products and services we offer, as well as enhancements to the delivery channels, in the communities and to the customers we serve. Through these initiatives, during 2015 we have continued 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 controlling operating expenses. We continue to implement our strategies to diversify earning assets and to increase low cost NOW and demand deposit, money market and savings accounts, or core deposits. These strategies include a greater level of participation in the local multi-family and commercial real estate mortgage lending markets and expanding our array of business banking products and services, focusing on small and middle market businesses with an emphasis on attracting clients from larger competitors. Our physical presence consists presently of our branch network of 88 locations, including our Long Island City, New York branch, which opened in late 2015, plus our dedicated business banking office in midtown Manhattan.

Our results of operations are dependent primarily on our net interest income, which is the difference between the interest earned on our assets, primarily our loan and securities portfolios, and the interest paid on our deposits and borrowings. Our net income is also affected by our provision for loan losses, non-interest income, non-interest expense (general and administrative expense) and income tax expense. Non-interest income includes customer service fees; other loan fees; net gain on sales of securities; mortgage banking income, net; income from bank owned life insurance, or BOLI; and other non-interest income. General and administrative expense consists of compensation and benefits expense; occupancy, equipment and systems expense; federal deposit insurance premium expense; advertising expense; and other operating expenses. Our earnings are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates and U.S. Treasury yield curves, government policies and actions of regulatory authorities.

In addition to Astoria Bank, Astoria Financial Corporation has one other direct wholly-owned subsidiary, AF Insurance Agency, Inc., which is consolidated with Astoria Financial Corporation for financial reporting purposes. AF Insurance Agency, Inc. is a licensed life insurance agency that makes insurance products available primarily to the customers of Astoria Bank through contractual agreements with various third parties.

On October 28, 2015, Astoria entered into an Agreement and Plan of Merger, or the Merger Agreement, with New York Community Bancorp, Inc., a Delaware corporation, or NYCB. The Merger Agreement provides that, upon the

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terms and subject to the conditions set forth therein, Astoria will merge with and into NYCB, with NYCB as the surviving corporation in the merger, such merger referred to as the Merger. Immediately following the Merger, Astoria’s wholly owned subsidiary, Astoria Bank, will merge with and into NYCB’s wholly owned subsidiary, New York Community Bank, such merger referred to as the Bank Merger. New York Community Bank will be the surviving entity in the Bank Merger. The Merger Agreement was unanimously approved and adopted by the Board of Directors of each of Astoria and NYCB and is subject to the receipt of customary shareholder and regulatory approvals, among other customary closing conditions. For additional information on the Merger and Bank Merger, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” or “MD&A.”

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 Securities and Exchange Commission, or SEC. Such reports are also available on the SEC’s website at www.sec.gov/edgar/searchedgar/webusers.htm.

Lending Activities

General

Our loan portfolio is comprised primarily of mortgage loans. At December 31, 2015 , 54% of our total loan portfolio was secured by residential properties and 44 % was secured by multi-family properties and commercial real estate, compared to 58% secured by residential properties and 40% secured by multi-family properties and commercial real estate at December 31, 2014 . The remainder of the loan portfolio consists of a variety of consumer and other loans, including commercial and industrial loans and home equity loans. At December 31, 2015 , our net loan portfolio totaled $11.06 billion , or 73% of total assets.

We originate multi-family and commercial real estate mortgage loans either indirectly through commercial mortgage brokers or through direct solicitation by our banking officers in New York in connection with our business banking operations. We originate residential mortgage loans either directly through our banking and loan production offices in New York or indirectly through brokers and our third party loan origination program. Mortgage loan originations and purchases for portfolio totaled $1.51 billion for the year ended December 31, 2015 and $1.64 billion for the year ended December 31, 2014 . At December 31, 2015 , $6.45 billion, or 59%, of our total mortgage loan portfolio was secured by properties located in New York and $4.41 billion, or 41%, of our total mortgage loan portfolio was secured by properties located in 34 other states and the District of Columbia. In addition to New York, we have a concentration of 5% or greater of our total mortgage loan portfolio in Connecticut at 6% and in New Jersey at 5%.

We also originate mortgage loans for sale in the secondary market. Generally, we originate 15 and 30 year fixed rate residential mortgage loans that conform to GSE guidelines (conforming loans) for sale to various GSEs or other investors on a servicing released or retained basis. The sale of such loans is generally arranged through a master commitment on a mandatory delivery or best efforts basis. Originations of residential mortgage loans held-for-sale totaled $127.7 million in 2015 and $105.2 million in 2014 , all of which were originated through our retail loan origination program. Loans serviced for others totaled $1.40 billion at December 31, 2015 .

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

Residential Mortgage Lending

Our primary residential lending emphasis is on the origination and purchase of first mortgage loans secured by properties that serve as the primary residence of the owner. We also originate a limited number of second home mortgage loans. At December 31, 2015 , residential mortgage loans totaled $6.02 billion , or 54% of our total loan portfolio, of which

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$4.27 billion, or 71%, were hybrid adjustable rate mortgage, or ARM, loans and $1.75 billion, or 29%, were fixed rate loans.

Residential mortgage loan originations and purchases for portfolio totaled $616.9 million during 2015 and $455.9 million during 2014 . Our residential retail loan origination program accounted for $311.3 million of portfolio originations during 2015 and $205.5 million during 2014 . We also have a residential broker network covering four states, primarily along the East Coast. Our residential broker loan origination program consists of relationships with mortgage brokers and accounted for $78.6 million of portfolio originations during 2015 and $56.2 million during 2014 . We purchase individual mortgage loans through our third party loan origination program which are subject to the same underwriting standards as our retail and broker originations. Our third party loan origination program includes relationships with other financial institutions and mortgage bankers covering 13 states and the District of Columbia and accounted for residential portfolio purchases of $227.0 million during 2015 and $194.2 million during 2014 . Our various loan origination programs provide efficient and diverse delivery channels for deployment of our cash flows. Additionally, our broker and third party loan origination programs provide geographic diversification, reducing our exposure to concentrations of credit risk.

We offer amortizing hybrid ARM loans with terms up to 30 years which initially have a fixed rate for five, seven or ten years and convert into one year ARM loans at the end of the initial fixed rate period. Prior to 2014, we also offered amortizing hybrid ARM loans with terms up to 40 years and loans with an initial fixed rate period of three years. Our amortizing hybrid ARM loans require the borrower to make principal and interest payments during the entire loan term. Our portfolio of residential amortizing hybrid ARM loans totaled $3.53 billion, or 59% of our total residential mortgage loan portfolio, at December 31, 2015 . Prior to the 2010 fourth quarter, we offered interest-only hybrid ARM loans with terms of up to forty years, which have an initial fixed rate for five or seven years and convert into one year interest-only ARM loans at the end of the initial fixed rate period. Our interest-only hybrid ARM loans require the borrower to pay interest only during the first ten years of the loan term. After the tenth anniversary of the loan, principal and interest payments are required to amortize the loan over the remaining loan term. Our portfolio of residential interest-only hybrid ARM loans totaled $735.5 million , or 12% of our total residential mortgage loan portfolio, at December 31, 2015 . We do not originate one year ARM loans. The ARM loans in our portfolio which currently reprice annually represent hybrid ARM loans (interest-only and amortizing) which have passed their initial fixed rate period. We do not originate negative amortization loans, payment option loans or other loans with short-term interest-only periods.

Within our residential mortgage loan portfolio we have reduced documentation loan products, substantially all of which are hybrid ARM loans (interest-only and amortizing). Reduced documentation loans are comprised primarily of SIFA (stated income, full asset) loans. To a lesser extent, our portfolio of reduced documentation loans also includes SISA (stated income, stated asset) loans. During the 2007 fourth quarter, we stopped offering reduced documentation loans. Reduced documentation loans in our residential mortgage loan portfolio totaled $885.2 million , or 15% of our total residential mortgage loan portfolio at December 31, 2015 , and included $135.7 million of SISA loans.

Generally, ARM loans pose credit risks somewhat greater than the risks posed by fixed rate loans primarily because, as interest rates rise, the underlying payments of the borrower increase when the loan is beyond its initial fixed rate period, particularly if the interest rate during the initial fixed rate period was at a discounted rate, increasing the potential for default. Interest-only hybrid ARM loans have an additional potential risk element when the loan payments adjust after the tenth anniversary of the loan to include principal payments, resulting in a further increase in the underlying payments. Since our interest-only hybrid ARM loans have a relatively long period to the principal payment adjustment, we believe this alleviates some of the additional credit risk due to the longer period for the borrower’s income to adjust to anticipated higher future payments. Additionally, we consider these risk factors in our underwriting of such loans and we do not offer loans with initial rates at deep discounts to the fully indexed rate. At December 31, 2015 , $1.36 billion of residential mortgage loans originated in prior years as interest-only loans were included in our portfolio of amortizing residential mortgage loans as a result of a refinance with us or through the conversion to amortizing loans at the end of their initial interest-only period, of which $517.7 million were refinanced or converted to amortizing loans during 2015.


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

We continue to manage the greater risk posed by our hybrid ARM loans through the application of sound underwriting policies and risk management procedures. Our risk management procedures and underwriting policies include a variety of factors and analyses. These include, but are not limited to, the determination of the markets in which we lend; the products we offer and the pricing of those products; the evaluation of potential borrowers and the characteristics of the property supporting the loan; the monitoring and analyses of the performance of our portfolio, in the aggregate and by segment, at various points in time and trends over time; and our collection efforts and marketing of delinquent and non-performing loans and foreclosed properties. We monitor our market areas and the performance and pricing of our various loan product offerings to determine the prudence of continuing to offer such loans and to determine what changes, if any, should be made to our product offerings and related underwriting.

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

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


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All of our hybrid ARM loans have annual and lifetime interest rate ceilings and floors. Such loans have, at times, been offered with an initial interest rate which is less than the fully indexed rate for the loan at the time of origination, referred to as a discounted rate. We determine the initial interest rate in accordance with market and competitive factors giving consideration to the spread over our funding sources in conjunction with our overall interest rate risk, or IRR, management strategies. In 2006, to recognize the credit risks associated with interest-only hybrid ARM loans, we began underwriting such loans based on a fully amortizing loan (in effect underwriting interest-only hybrid ARM loans as if they were amortizing hybrid ARM loans). Prior to 2007, we would underwrite our interest-only hybrid ARM loans using the initial note rate, which may have been a discounted rate. We monitor credit risk on interest-only hybrid ARM loans that were underwritten at the initial note rate, which may have been a discounted rate, in the same manner as we monitor credit risk on all interest-only hybrid ARM loans. Our portfolio of residential interest-only hybrid ARM loans which were underwritten at the initial note rate, which may have been a discounted rate, totaled $388.0 million , or 6% of our total residential mortgage loan portfolio, at December 31, 2015 . In 2007, we began underwriting our interest-only hybrid ARM loans at the higher of the fully indexed rate or the initial note rate. In 2009, we began underwriting our interest-only and amortizing hybrid ARM loans at the higher of the fully indexed rate, the initial note rate or 6.00%. During the 2010 second quarter, we reduced the underwriting interest rate floor from 6.00% to 5.00% to reflect the interest rate environment. During the 2010 third quarter we stopped offering interest-only loans.

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

Multi-Family and Commercial Real Estate Lending

Our primary multi-family and commercial real estate lending emphasis is on the origination of mortgage loans on rent controlled and rent stabilized apartment buildings located in the greater New York metropolitan area, including the five boroughs of New York City, Nassau, Suffolk and Westchester counties in New York, and parts of New Jersey and Connecticut. At December 31, 2015 , multi-family mortgage loans totaled $4.02 billion , or 36% of our total loan portfolio, and commercial real estate loans totaled $819.5 million , or 7% of our total loan portfolio. The multi-family and commercial real estate loans in our portfolio consist of both fixed rate and adjustable rate loans which were originated at prevailing market rates. Multi-family and commercial real estate loans we currently offer generally include adjustable and fixed rate balloon loans with terms up to 15 years, amortized over 15 to 30 years. We also offer interest-only mortgage loans, primarily for loans secured by multi-family cooperative properties, to qualified borrowers, underwritten on an amortizing basis. Such loans generally require interest-only payments for the term of the loan, which generally ranges from five to ten years, and typically provide for a balloon payment at maturity. Interest-only loans represented less than 7% of our total multi-family and commercial real estate loan portfolio at December 31, 2015 . Included in our multi-family and commercial real estate loan portfolios are mixed use loans secured by properties which are intended for both residential and commercial use. Mixed use loans are classified as multi-family or commercial real estate based on the respective percentage of income from residential and commercial uses.

Our policy generally has been to originate multi-family and commercial real estate mortgage loans in the New York metropolitan area, which includes New York, New Jersey and Connecticut. During 2009, due primarily to conditions in the real estate market and economic environment at that time, we suspended originations of multi-family and commercial real estate loans. During the 2011 third quarter, we resumed originations of such loans in the New York metropolitan area. Our current strategies include greater participation in the local multi-family and commercial real estate mortgage lending markets. Originations of multi-family and commercial real estate loans totaled $890.7 million during the year ended December 31, 2015 and $1.19 billion during the year ended December 31, 2014 .

In originating multi-family and commercial real estate loans, we primarily consider the ability of the net operating income generated by the real estate to support the debt service, the financial resources, income level and managerial expertise of the borrower, the marketability of the property and our lending experience with the borrower. Our current policy for multi-family loans is to require a minimum debt service coverage ratio of 1.20 times and to finance up to

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75% of the lesser of the purchase price or appraised value of the property securing the loan on purchases or 75% of the appraised value on refinances. For commercial real estate loans, our current policy is to require a minimum debt service coverage ratio of 1.25 times and to finance up to 70% of the lesser of the purchase price or appraised value of the property securing the loan on purchases or 70% of the appraised value on refinances. In addition, we perform analyses to determine the ability of the net operating income generated by the real estate to meet the debt service obligation under various stress scenarios.

The majority of the multi-family loans in our portfolio are secured by five to fifty-unit apartment buildings and mixed use properties (containing both residential and commercial uses). Commercial real estate loans are typically secured by retail, office and mixed use properties (more commercial than residential uses). The average balance of multi-family and commercial real estate loans originated during 2015 was $2.6 million . At December 31, 2015, our single largest multi-family credit had an outstanding balance of $36.0 million, was current and was secured by a 432-unit cooperative apartment building with 22 retail units in the Bronx. At December 31, 2015 , the average balance of loans in our multi-family portfolio was approximately $1.8 million. At December 31, 2015 , our single largest commercial real estate credit had an outstanding principal balance of $14.3 million, was current and was secured by a building with 100% commercial tenancy in Manhattan. At December 31, 2015 , the average balance of loans in our commercial real estate portfolio was approximately $1.6 million.

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

Consumer and Other Loans

At December 31, 2015 , $252.7 million , or 2% , of our total loan portfolio, consisted of consumer and other loans. Included in consumer and other loans at December 31, 2015 were $160.8 million of home equity and other consumer loans and $91.9 million of commercial and industrial loans.

Home equity and other consumer loans consist primarily of home equity lines of credit. Other consumer loans in this portfolio include overdraft protection, lines of credit and passbook loans which are primarily offered on a fixed rate, short-term basis. Home equity lines of credit are adjustable rate loans which are indexed to the prime rate and generally reset monthly. Such lines of credit were underwritten based on our evaluation of the borrower’s ability to repay the debt. Prior to the 2007 fourth quarter, these lines of credit were generally limited to aggregate outstanding indebtedness secured by up to 90% of the appraised value of the property. During the 2007 fourth quarter, we revised our policy on originations of home equity lines of credit to limit aggregate outstanding indebtedness to 75% of the appraised value of the property and only for loans where we hold the first lien mortgage on the property. During the 2008 third quarter, we revised our policy to limit aggregate outstanding indebtedness to 60% of the appraised value of the property and only for properties located in New York. During the 2010 first quarter, we discontinued originating home equity lines of credit. In the 2014 fourth quarter, we resumed originations of home equity lines of credit, limited to an aggregate outstanding indebtedness secured by up to 80% of the appraised value of the property, up to a combined loan amount of $750,000 and up to 75% for loan amounts over $750,000 and not more than $1.0 million.

The underwriting standards we employ for consumer and other loans include a determination of the borrower’s payment history on other debts and an assessment of the borrower's ability to make payments on the proposed loan and other indebtedness. In addition to the creditworthiness of the borrower, the underwriting process also includes a review of the value of the collateral, if any, in relation to the proposed loan amount. In general, home equity and other consumer

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loans tend to have higher interest rates, shorter maturities and are considered to entail a greater risk of default than residential mortgage loans.

Commercial and industrial loans offered through our business banking operations primarily include secured lines of credit, equipment loans, letters of credit and term loans. Substantially all of our commercial and industrial loans at December 31, 2015 were originated since 2012 as part of our strategy to expand our business banking operations and diversify our earning assets. We focus on making commercial and industrial loans to small and medium-sized businesses, primarily located in our branch footprint, in a wide variety of industries. These loans are underwritten based upon the cash flow and earnings of the borrower and the value of the collateral securing such loans, if any.

Loan Approval Procedures and Authority

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

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

Pursuant to the terms of the Merger Agreement, we are limited in our ability to make loans or extensions of credit outside of the ordinary course of business or in excess of $10 million in a single transaction, in each case, without the consent of NYCB. NYCB has agreed not to unreasonably withhold any such consent.


9


Loan Portfolio Composition

The following table sets forth the composition of our loan portfolio in dollar amounts and percentages of the portfolio at the dates indicated.
 
At December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
(Dollars in Thousands)
Amount
Percent of Total
 
Amount
Percent of Total
 
Amount
Percent of Total
 
Amount
Percent of Total
 
Amount
Percent of Total
Mortgage loans (gross):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
6,015,415

54.14
%
 
$
6,873,536

57.71
%
 
$
8,037,276

64.89
%
 
$
9,711,226

73.82
%
 
$
10,561,539

80.02
%
Multi-family
4,024,105

36.21

 
3,913,053

32.86

 
3,296,455

26.61

 
2,406,678

18.29

 
1,693,871

12.84

Commercial real estate
819,514

7.38

 
873,765

7.34

 
812,966

6.56

 
773,916

5.88

 
659,706

5.00

Total mortgage loans
10,859,034

97.73

 
11,660,354

97.91

 
12,146,697

98.06

 
12,891,820

97.99

 
12,915,116

97.86

Consumer and other loans (gross):
 
 
 
 

 
 
 

 
 
 

 
 
 

 
Home equity and other consumer
160,819

1.44

 
184,553

1.55

 
208,923

1.69

 
242,119

1.84

 
270,408

2.05

Commercial and industrial
91,874

0.83

 
64,815

0.54

 
30,758

0.25

 
21,975

0.17

 
12,036

0.09

Total consumer and other loans
252,693

2.27

 
249,368

2.09

 
239,681

1.94

 
264,094

2.01

 
282,444

2.14

Total loans (gross)
11,111,727

100.00
%
 
11,909,722

100.00
%
 
12,386,378

100.00
%
 
13,155,914

100.00
%
 
13,197,560

100.00
%
Net unamortized premiums and deferred loan origination costs
41,354

 
 
47,726

 
 
55,688

 
 
68,058

 
 
77,044

 
Loans receivable
11,153,081

 
 
11,957,448

 
 
12,442,066

 
 
13,223,972

 
 
13,274,604

 
Allowance for loan losses
(98,000
)
 
 
(111,600
)
 
 
(139,000
)
 
 
(145,501
)
 
 
(157,185
)
 
Loans receivable, net
$
11,055,081

 
 
$
11,845,848

 
 
$
12,303,066

 
 
$
13,078,471

 
 
$
13,117,419

 

Loan Maturity, Repricing and Activity

The following table shows the contractual maturities of our loafns receivable at December 31, 2015 and does not reflect the effect of prepayments or scheduled principal amortization.
 
At December 31, 2015
(In Thousands)
Residential
 
Multi-
Family
 
Commercial
Real Estate
 
Consumer
and
Other
 
Total
Amount due:
 

 
 

 
 
 

 
 
 
 

 
 
 

Within one year
$
5,112

 
$
31,877

 
 
$
45,181

 
 
 
$
68,668

 
 
$
150,838

After one year:
 

 
 

 
 
 

 
 
 
 

 
 
 

Over one to three years
12,324

 
559,963

 
 
177,999

 
 
 
6,966

 
 
757,252

Over three to five years
18,524

 
596,155

 
 
196,217

 
 
 
13,308

 
 
824,204

Over five to ten years
206,736

 
1,551,209

 
 
190,658

 
 
 
11,379

 
 
1,959,982

Over ten to twenty years
2,244,291

 
1,272,287

 
 
208,366

 
 
 
99,286

 
 
3,824,230

Over twenty years
3,528,428

 
12,614

 
 
1,093

 
 
 
53,086

 
 
3,595,221

Total due after one year
6,010,303

 
3,992,228

 
 
774,333

 
 
 
184,025

 
 
10,960,889

Total amount due
$
6,015,415

 
$
4,024,105

 
 
$
819,514

 
 
 
$
252,693

 
 
$
11,111,727

Net unamortized premiums and
deferred loan origination costs
 

 
 

 
 
 

 
 
 
 

 
 
41,354

Allowance for loan losses
 

 
 

 
 
 

 
 
 
 

 
 
(98,000
)
Loans receivable, net
 

 
 

 
 
 

 
 
 
 

 
 
$
11,055,081



10


The following table sets forth at December 31, 2015 , the dollar amount of our loans receivable contractually maturing after December 31, 2016 , and whether such loans have fixed interest rates or adjustable interest rates.  Our interest-only and amortizing hybrid ARM loans are classified as adjustable rate loans.
 
Maturing After December 31, 2016
(In Thousands)  
Fixed
 
Adjustable
 
Total
Mortgage loans:
 

 
 

 
 

Residential
$
1,744,773

 
$
4,265,530

 
$
6,010,303

Multi-family
2,626,673

 
1,365,555

 
3,992,228

Commercial real estate
494,800

 
279,533

 
774,333

Consumer and other loans
29,223

 
154,802

 
184,025

Total
$
4,895,469

 
$
6,065,420

 
$
10,960,889


The following table sets forth our loan originations, purchases, sales and principal repayments for the periods indicated, including loans held-for-sale.
 
For the Year Ended December 31,
(In Thousands)  
2015
 
2014
 
2013
Mortgage loans (gross) (1):
 

 
 

 
 

Balance at beginning of year
$
11,667,994

 
$
12,154,132

 
$
12,968,186

Originations:
 

 
 
 
 

Residential
517,618

 
366,792

 
848,607

Multi-family
784,063

 
1,012,150

 
1,319,837

Commercial real estate
106,616

 
174,341

 
233,330

Total originations
1,408,297

 
1,553,283

 
2,401,774

Purchases (2)
227,034

 
194,237

 
403,481

Principal repayments
(2,291,194
)
 
(1,887,465
)
 
(3,201,751
)
Sales
(135,365
)
 
(286,522
)
 
(341,219
)
Transfer of loans to real estate owned
(7,783
)
 
(43,448
)
 
(51,333
)
Net loans charged off
(993
)
 
(16,223
)
 
(25,006
)
Balance at end of year
$
10,867,990

 
$
11,667,994

 
$
12,154,132

Consumer and other loans (gross):
 

 
 

 
 

Balance at beginning of year
$
249,368

 
$
239,681

 
$
264,094

Originations and advances
162,943

 
109,208

 
77,597

Principal repayments
(159,083
)
 
(97,813
)
 
(100,914
)
Net loans charged off
(535
)
 
(1,708
)
 
(1,096
)
Balance at end of year
$
252,693

 
$
249,368

 
$
239,681

 
(1)
Includes loans classified as held-for-sale totaling $9.0 million at December 31, 2015 , $7.6 million at December 31, 2014 and $7.4 million at December 31, 2013 , exclusive of valuation allowances totaling $54,000 at December 31, 2013 .
(2)
Purchases of mortgage loans represent third party loan originations and are secured by residential properties.
 
Asset Quality

General

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


11


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

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. Although the U.S. economy has shown signs of modest improvement, the operating environment continues to remain challenging. Interest rates have been at or near historical lows, and despite the December 2015 action by the Federal Open Market Committee, or FOMC, to raise the federal funds interest rate by 25 basis points and the FOMC's economic projections implying several additional increases in 2016, the federal funds futures market appears to be discounting such actions. 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 first rate hike in almost a decade and the divergence in monetary policy of the FOMC and its global counterparts. The ten-year U.S. Treasury rate started 2015 at 2.17% and ended the year at 2.27%, while ranging between a low of 1.68% and a high of 2.50%. The national unemployment rate decreased to 5.0% for December 2015 compared to 5.6% for December 2014, and new job growth in 2015 has continued its slow pace. We believe market conditions remain favorable in the New York metropolitan area with respect to our multi-family mortgage loan origination activities, though some competitor institutions in this market have offered rates and/or product terms at levels which we have chosen not to offer.

Pursuant to the terms of the Merger Agreement, we are limited in our ability to change in any material respect our risk and asset liability management policies without the consent of NYCB. NYCB has agreed not to unreasonably withhold any such consent.

Non-performing Assets

Non-performing assets, which include non-performing loans and real estate owned, or REO, decreased $ 5.5 million to $158.0 million at December 31, 2015 , from $163.5 million at December 31, 2014 , reflecting a significant decline in REO, net, partially offset by an increase in non-performing loans. At December 31, 2015 REO, net, totaled $19.8 million , down $15.9 million from $35.7 million at December 31, 2014. Non-performing loans, which are comprised primarily of mortgage loans, include all non-accrual loans, and, to a lesser extent, mortgage loans past due 90 days or more and still accruing interest, and exclude loans held-for-sale and loans modified in a troubled debt restructuring, or TDR, which have been returned to accrual status. At December 31, 2015, non-performing loans totaled $138.2 million , up $10.4 million compared to $127.8 million at December 31, 2014 . The ratio of non-performing assets to total assets was 1.05% at December 31, 2015, unchanged from December 31, 2014. The ratio of non-performing loans to total loans increased to 1.24% at December 31, 2015 , from 1.07% at December 31, 2014 . The allowance for loan losses as a percentage of total non-performing loans decreased to 70.90% at December 31, 2015 , from 87.32% at December 31, 2014 . For further discussion of our non-performing assets, non-performing loans and the allowance for loan losses, see Item 7, “MD&A.”

We may agree, in certain instances, to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a TDR. Modifications as a result of a TDR may include, but are not limited to, interest rate modifications, payment deferrals, restructuring of payments to interest-only from amortizing and/or extensions of maturity dates. Modifications which result in insignificant payment delays and payment shortfalls are generally not classified as a TDR. Residential mortgage loans discharged in a Chapter 7 bankruptcy filing, or bankruptcy loans, are also reported as loans modified in a TDR as relief granted by a court is also viewed as a concession to the borrower in the loan agreement. Loans modified in a TDR are individually classified as impaired and are initially placed on non-accrual status regardless of

12


their delinquency status. Loans modified in a TDR which are included in non-performing loans totaled $61.0 million at December 31, 2015 and $68.4 million at December 31, 2014 , of which $47.6 million at December 31, 2015 and $60.4 million at December 31, 2014 were current or less than 90 days past due. Loans modified in a TDR 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. Restructured accruing loans totaled $101.8 million at December 31, 2015 and $106.0 million at December 31, 2014 . For further detail on loans modified in a TDR, see Note 1 and Note 5 in Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

We discontinue accruing interest on loans when they become 90 days past due as to their payment due date and at the time a loan is deemed a TDR. We may also discontinue accruing interest on certain other loans earlier because of deterioration in financial or other conditions of the borrower. In addition, we reverse all previously accrued and uncollected interest through a charge to interest income. While loans are in non-accrual status, interest due is monitored and, presuming we deem the remaining recorded investment in the loan to be fully collectible, income is recognized only to the extent cash is received until a return to accrual status is warranted. In some circumstances, we may continue to accrue interest on mortgage loans past due 90 days or more, primarily as to their maturity date but not their interest due. In other cases, we may defer recognition of income until the principal balance has been recovered.

We obtain updated estimates of collateral values on residential mortgage loans at 180 days past due and earlier in certain instances, including for loans to borrowers who have filed for bankruptcy, and, to the extent the loans remain delinquent, annually thereafter. Updated estimates of collateral values on residential loans are obtained primarily through automated valuation models. Additionally, our loan servicer performs property inspections to monitor and manage the collateral on our residential loans when they become 45 days past due and monthly thereafter until the foreclosure process is complete. We obtain updated estimates of collateral value using third party appraisals on non-performing multi-family and commercial real estate mortgage loans when the loans initially become non-performing and annually thereafter and multi-family and commercial real estate loans modified in a TDR at the time of the modification and annually thereafter. Appraisals on multi-family and commercial real estate loans are reviewed by our internal certified appraisers. We analyze our home equity lines of credit when such loans become 90 days past due and consider our lien position, the estimated fair value of the underlying collateral value and the results of recent property inspections in determining the need for an individual valuation allowance. We also obtain updated estimates of collateral value for certain other loans when the Asset Classification Committee believes repayment of such loans may be dependent on the value of the underlying collateral. Adjustments to final appraised values obtained from independent third party appraisers and automated valuation models are not made.

We proactively manage our non-performing assets, in part, through the sale of certain individual delinquent and non-performing loans. During the year ended December 31, 2015 , we sold $7.5 million , net of recoveries of $1.1 million , of delinquent and non-performing mortgage loans, primarily multi-family and commercial real estate mortgage loans. At December 31, 2015 , included in loans held-for-sale, net, were non-performing mortgage loans totaling $1.6 million , which primarily consisted of multi-family mortgage loans. Such non-performing loans held-for-sale are excluded from non-performing loans, non-performing assets and related ratios.

In the 2014 second quarter, we conducted an evaluation of our residential mortgage loans 90 days or more past due for the purpose of determining whether a greater value could be derived in a potential bulk sale, should such be sought, in excess of that which we have realized in recent periods through our traditional approach of working loans out individually.  This evaluation indicated that market conditions at that time could be favorable for a potential bulk sale and, in June 2014, we sought indicative bid values on a designated pool of our non-performing residential mortgage loans from multiple potential investors, and at June 30, 2014 we designated the pool as non-performing loans held-for-sale. In connection with the designation of the pool of loans as held-for-sale, we recorded a charge-off of $8.7 million against the allowance for loan losses during the 2014 second quarter to write down the pool of loans from its immediately previous aggregate recorded investment of $195.0 million to its estimated fair value at the time of $186.3 million. As a result of our quarterly review of the adequacy of the allowance for loan losses as of June 30, 2014, $5.7

13


million of reserves previously attributable to this pool of loans was deemed no longer required and was credited to the provision for loan losses as a reserve release in the 2014 second quarter. During the 2014 third quarter, we completed a bulk sale transaction of substantially all of the non-performing residential mortgage loans held-for-sale. The majority of the remaining loans from the pool designated as held-for-sale as of June 30, 2014 were either foreclosed upon and transferred to REO, or were satisfied via short sales or payoffs during the 2014 third quarter with the balance of the loans held-for-sale sold in a second transaction in September 2014, with the same counterparty as the bulk sale transaction. In 2015, no loans were sold in a bulk sale transaction.

REO represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is initially recorded at estimated fair value less estimated selling costs. Thereafter, we maintain a valuation allowance, representing decreases in the properties’ estimated fair value, through charges to earnings. Such charges are included in other non-interest expense along with any additional property maintenance and protection expenses incurred in owning the property. Fair value is estimated through current appraisals, in conjunction with a drive-by inspection and comparison of the REO property with similar properties in the area by either a licensed appraiser or real estate broker. As these properties are actively marketed, estimated fair values are periodically adjusted by management to reflect current market conditions. At December 31, 2015 we held 50 properties in REO totaling $19.8 million , net of a valuation allowance of $1.3 million , $17.8 million of which were residential properties. At December 31, 2014 we held 111 properties in REO totaling $35.7 million, net of a valuation allowance of $839,000, substantially all of which were residential properties.

Criticized and Classified Assets

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

Impaired Loans

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

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

14


of the underlying collateral less estimated selling costs, for collateral dependent loans, the observable market price of the loan or the present value of the discounted cash flows of a modified loan, is generally charged-off.

Impaired loans totaled $222.7 million, net of their related allowance for loan losses of $14.8 million, at December 31, 2015 and $228.7 million, net of their related allowance for loan losses of $19.7 million, at December 31, 2014 . Interest income recognized on impaired loans amounted to $8.8 million for the year ended December 31, 2015 . For further detail on our impaired loans, see Note 1 and Note 5 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

Allowance for Loan Losses

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

In addition to the requirements of U.S. generally accepted accounting principles, or GAAP, related to loss contingencies, a federally chartered savings association’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OCC. The OCC, in conjunction with the other federal banking agencies, provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate valuation allowances and guidance for banking agency examiners to use in determining the adequacy of valuation allowances. It is required that all institutions have effective systems and controls to identify, monitor and address asset quality problems, analyze all significant factors that affect the collectibility of the portfolio in a reasonable manner and establish acceptable allowance evaluation processes that meet the objectives of the federal regulatory agencies. While we believe that the allowance for loan losses has been established and maintained at adequate levels, future adjustments may be necessary if economic or other conditions differ substantially from the conditions used in making our estimates at December 31, 2015 . In addition, there can be no assurance that the OCC or other regulators, as a result of reviewing our loan portfolio and/or allowance, will not request that we alter our allowance for loan losses, thereby affecting our financial condition and earnings.

Investment Activities

General

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

Federally chartered savings associations have authority to invest in various types of assets, including U.S. Treasury obligations; securities of government agencies and GSEs; mortgage-backed securities, including collateralized mortgage obligations, or CMOs, and real estate mortgage investment conduits, or REMICs; certain certificates of deposit of insured banks and federally chartered savings associations; certain bankers acceptances; and, subject to certain limits, corporate securities, commercial paper and mutual funds. Our investment policy also permits us to invest in certain derivative financial instruments. We do not use derivatives for trading purposes. As a member of the Federal Home Loan Bank, or FHLB, of New York, or FHLB-NY, Astoria Bank is required to maintain a specified investment in the capital stock of the FHLB-NY. See “Regulation and Supervision - Federal Home Loan Bank System.”

Pursuant to the terms of the Merger Agreement, we are limited in our ability to (i) make material investments, (ii) transfer our material assets and (iii) materially restructure or change our investment portfolio or interest rate exposure, in each case, without the consent of NYCB. NYCB has agreed not to unreasonably withhold any such consent.


15


Securities

At December 31, 2015 , our securities portfolio totaled $2.71 billion, or 18% of total assets, and was comprised primarily of mortgage-backed securities. At December 31, 2015 , our mortgage-backed securities, which were primarily collateralized by residential mortgage loans, totaled $2.40 billion, or 89% of total securities, of which $2.13 billion, or 79% of total securities, were REMIC and CMO securities. Substantially all of our REMIC and CMO securities had fixed interest rates and were guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae as issuer, with the balance of this portfolio comprised of privately issued securities, which were primarily investment grade securities. In addition to our REMIC and CMO securities, at December 31, 2015 , we had $272.0 million, or 10% of total securities, in mortgage-backed pass-through certificates guaranteed by either Fannie Mae, Freddie Mac or Ginnie Mae. These securities provide liquidity, collateral for borrowings and minimal credit risk while providing appropriate returns and are an attractive alternative to other investments due to the wide variety of maturity and repayment options available.

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

In addition to mortgage-backed securities, at December 31, 2015 , we had $311.3 million of other securities, consisting primarily of obligations of GSEs which, by their terms, may be called by the issuer, typically after the passage of a fixed period of time. At December 31, 2015 , the amortized cost of callable securities totaled $252.7 million. During the year ended December 31, 2015 , eight securities with a carrying value of $108.4 million were called. In addition, we had $60.0 million of corporate debt securities that were all investment grade securities.

At December 31, 2015 , our securities available-for-sale totaled $416.8 million and our securities held-to-maturity totaled $2.30 billion . For further discussion of our securities portfolio, see Item 7, “MD&A,” Note 1 and Note 3 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data,” and the tables that follow.


16


The following table sets forth the composition of our available-for-sale and held-to-maturity securities portfolios at their respective carrying values in dollar amounts and percentages of the portfolios at the dates indicated.  Our available-for-sale securities portfolio is carried at estimated fair value and our held-to-maturity securities portfolio is carried at amortized cost.
 
At December 31,
 
2015
 
2014
 
2013
(Dollars in Thousands)
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
Securities available-for-sale:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

GSE issuance REMICs and CMOs
$
330,539

 
79.31
%
 
$
268,998

 
69.99
%
 
$
286,074

 
71.22
%
Non-GSE issuance REMICs and CMOs
3,054

 
0.73

 
5,104

 
1.33

 
7,572

 
1.89

GSE pass-through certificates
11,264

 
2.70

 
13,557

 
3.53

 
16,888

 
4.20

Obligations of GSEs
71,939

 
17.26

 
96,698

 
25.16

 
91,153

 
22.69

Fannie Mae stock
2

 

 
2

 

 
3

 

Total securities available-for-sale
$
416,798

 
100.00
%
 
$
384,359

 
100.00
%
 
$
401,690

 
100.00
%
Securities held-to-maturity:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

GSE issuance REMICs and CMOs
$
1,361,907

 
59.30
%
 
$
1,575,402

 
73.83
%
 
$
1,474,506

 
79.73
%
Non-GSE issuance REMICs and CMOs
198

 
0.01

 
2,482

 
0.12

 
3,833

 
0.21

GSE pass-through certificates
260,707

 
11.35

 
281,685

 
13.20

 
282,473

 
15.27

Multi-family mortgage-backed securities:
 
 


 
 
 


 
 
 


     GSE issuance REMICs
434,587

 
18.92

 
154,381

 
7.24

 

 

Obligations of GSEs
178,967

 
7.79

 
119,336

 
5.59

 
88,128

 
4.76

Corporate debt securities
60,000

 
2.61

 

 

 

 

Other
433

 
0.02

 
518

 
0.02

 
586

 
0.03

Total securities held-to-maturity
$
2,296,799

 
100.00
%
 
$
2,133,804

 
100.00
%
 
$
1,849,526

 
100.00
%


17


The following contractual maturity table sets forth certain information regarding the amortized costs, estimated fair values and weighted average yields of our FHLB-NY stock, securities available-for-sale and securities held-to-maturity at December 31, 2015 and does not reflect the effect of prepayments or scheduled principal amortization on our REMICs, CMOs and pass-through certificates or the effect of callable features on our obligations of GSEs.
 
Within One Year
 
Over One to Five Years
 
Over Five to Ten Years
 
Over Ten Years
 
Total Securities
(Dollars in Thousands)
Amortized
Cost
Weighted
Average
Yield
 
Amortized
Cost
Weighted
Average
Yield
 
Amortized
Cost
Weighted
Average
Yield
 
Amortized
Cost
Weighted
Average
Yield
 
Amortized
Cost
 
Estimated
Fair
Value
Weighted
Average
Yield
FHLB-NY stock (1)(2)
 
$

 
 
%
 
 
 
$

 
 
%
 
 
 
$

 
 
%
 
 
$
131,137

 
4.10
%
 
 
$
131,137

 
$
131,137

 
4.10
%
 
Securities available-for-sale:
 
 

 
 
 

 
 
 
 

 
 
 

 
 
 
 

 
 
 

 
 
 

 
 

 
 
 

 
 

 
 

 
Residential REMICs and CMOs:
 
 

 
 
 

 
 
 
 

 
 
 

 
 
 
 

 
 
 

 
 
 

 
 

 
 
 

 
 

 
 

 
GSE issuance
 
$

 
 
%
 
 
 
$
1,016

 
 
4.25
%
 
 
 
$
6,700

 
 
3.76
%
 
 
$
323,383

 
2.48
%
 
 
$
331,099

 
$
330,539

 
2.51
%
 
Non-GSE issuance
 

 
 

 
 
 
2,986

 
 
3.29

 
 
 
62

 
 
2.77

 
 

 

 
 
3,048

 
3,054

 
3.28

 
GSE pass-through certificates
 
123

 
 
6.75

 
 
 
344

 
 
4.46

 
 
 
4,969

 
 
2.36

 
 
5,345

 
2.65

 
 
10,781

 
11,264

 
2.62

 
Obligations of GSEs (3)
 

 
 

 
 
 

 
 

 
 
 
73,701

 
 
2.17

 
 

 

 
 
73,701

 
71,939

 
2.17

 
Fannie Mae stock (1)(4)
 

 
 

 
 
 

 
 

 
 
 

 
 

 
 
15

 

 
 
15

 
2

 

 
Total securities available-for-sale
 
$
123

 
 
6.75
%
 
 
 
$
4,346

 
 
3.61
%
 
 
 
$
85,432

 
 
2.31
%
 
 
$
328,743

 
2.48
%
 
 
$
418,644

 
$
416,798

 
2.46
%
 
Securities held-to-maturity:
 
 

 
 
 

 
 
 
 

 
 
 

 
 
 
 

 
 
 

 
 
 

 
 

 
 
 

 
 

 
 

 
Residential REMICs and CMOs:
 
 

 
 
 

 
 
 
 

 
 
 

 
 
 
 

 
 
 

 
 
 

 
 

 
 
 

 
 

 
 

 
GSE issuance
 
$

 
 
%
 
 
 
$
2,340

 
 
1.30
%
 
 
 
$
36,855

 
 
3.09
%
 
 
$
1,322,712

 
2.45
%
 
 
$
1,361,907

 
$
1,355,914

 
2.47
%
 
Non-GSE issuance
 

 
 

 
 
 

 
 

 
 
 

 
 

 
 
198

 
4.75

 
 
198

 
193

 
4.75

 
GSE pass-through certificates
 
1

 
 
9.60

 
 
 
32

 
 
9.09

 
 
 

 
 

 
 
260,674

 
2.18

 
 
260,707

 
258,829

 
2.18

 
Multi-family REMICs - GSE issuance
 

 
 

 
 
 

 
 

 
 
 

 
 

 
 
434,587

 
2.57

 
 
434,587

 
433,508

 
2.57

 
Obligations of GSEs (3)
 

 
 

 
 
 

 
 

 
 
 
178,967

 
 
2.53

 
 

 

 
 
178,967

 
178,707

 
2.53

 
Corporate debt securities
 

 
 

 
 
 

 
 

 
 
 
50,000

 
 
3.51

 
 
10,000

 
4.00

 
 
60,000

 
58,507

 
3.59

 
Other
 
1

 
 
3.13

 
 
 
431

 
 
7.23

 
 
 

 
 

 
 
1

 
7.00

 
 
433

 
434

 
7.23

 
Total securities held-to-maturity
 
$
2

 
 
6.37
%
 
 
 
$
2,803

 
 
2.30
%
 
 
 
$
265,822

 
 
2.79
%
 
 
$
2,028,172

 
2.45
%
 
 
$
2,296,799

 
$
2,286,092

 
2.49
%
 

(1)
Equity securities have no stated maturities and are therefore classified in the over ten years category.
(2)
The carrying amount of FHLB-NY stock equals cost.  The weighted average yield represents the 2015 third quarter annualized dividend rate declared by the FHLB-NY in November 2015.
(3)
Substantially all are callable in 2016 and at various times thereafter.
(4)
The weighted average yield of Fannie Mae stock reflects the Federal Housing Finance Agency decision to suspend dividend payments indefinitely.

The following table sets forth the aggregate amortized cost and estimated fair value of our securities where the aggregate amortized cost of securities from a single issuer exceeds 10% of our stockholders’ equity at December 31, 2015 .
(In Thousands)
Amortized Cost
 
Estimated Fair Value
Fannie Mae
$
1,140,434

 
$
1,129,301

Freddie Mac
830,816

 
831,185



18


Sources of Funds

General

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

Deposits

We offer a variety of deposit accounts with a range of interest rates and terms. We presently offer NOW and demand deposit accounts, money market accounts, passbook and statement savings accounts and certificates of deposit. At December 31, 2015 , our deposits totaled $9.11 billion . Of the total deposit balance, $849.0 million, or 9%, represent Individual Retirement Accounts. We held no brokered deposits at December 31, 2015 .

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

Core deposits represented 78% of total deposits at December 31, 2015 . Our deposit growth strategy includes expanding our business banking sales force and expanding our branch network into other prime locations on Long Island and in Manhattan. We opened a branch in Long Island City, New York in late 2015. We focus on small and middle market businesses within our market area in order to further increase core deposits. Total deposits included $1.05 billion of business deposits at December 31, 2015 , an increase of 13% since December 31, 2014 , substantially all of which were core deposits, reflecting the expansion of our business banking operations, a component of the strategic shift in our balance sheet.

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

The following table presents our deposit activity for the periods indicated.
 
For the Year Ended December 31,
(Dollars in Thousands)   
2015
 
2014
 
2013
Opening balance
$
9,504,909

 
$
9,855,310

 
$
10,443,958

Net withdrawals
(436,225
)
 
(401,756
)
 
(651,265
)
Interest credited
37,343

 
51,355

 
62,617

Ending balance
$
9,106,027

 
$
9,504,909

 
$
9,855,310

Net decrease
$
398,882

 
$
350,401

 
$
588,648

Percentage decrease
4.20
%
 
3.56
%
 
5.64
%


19


The following table sets forth the maturity periods of our certificates of deposit in amounts of $100,000 or more at December 31, 2015 .
(In Thousands)
Amount
Within three months
$
159,953

Over three to six months
56,591

Over six to twelve months
50,881

Over twelve months
323,161

Total
$
590,586


The following table sets forth the distribution of our average deposit balances for the periods indicated and the weighted average interest rates for each category of deposit presented.
 
For the Year Ended December 31,
 
2015
 
2014
 
2013
(Dollars in Thousands)
Average
Balance
 
Percent
of Total
 
Weighted
Average
Rate
 
Average
Balance
 
Percent
of Total
 
Weighted
Average
Rate
 
Average
Balance
 
Percent
of Total
 
Weighted
Average
Rate
NOW
$
1,342,958

 
14.60
%
 
 
0.06
%
 
 
$
1,236,760

 
12.82
%
 
 
0.06
%
 
 
$
1,221,094

 
12.00
%
 
 
0.06
%
 
Non-interest bearing NOW and demand deposit
928,022

 
10.09

 
 

 
 
897,517

 
9.30

 
 

 
 
873,151

 
8.58

 
 

 
Money market
2,459,170

 
26.73

 
 
0.26

 
 
2,187,718

 
22.68

 
 
0.25

 
 
1,824,729

 
17.93

 
 
0.31

 
Savings
2,186,704

 
23.77

 
 
0.05

 
 
2,364,679

 
24.52

 
 
0.05

 
 
2,659,433

 
26.13

 
 
0.05

 
Total
6,916,854

 
75.19

 
 
0.12

 
 
6,686,674

 
69.32

 
 
0.11

 
 
6,578,407

 
64.64

 
 
0.12

 
Certificates of deposit (1):
 

 
 

 
 
 

 
 
 

 
 

 
 
 

 
 
 

 
 

 
 
 

 
Within one year
404,862

 
4.40

 
 
0.07

 
 
508,160

 
5.27

 
 
0.07

 
 
705,385

 
6.93

 
 
0.07

 
Over one to three years
605,168

 
6.58

 
 
0.74

 
 
890,318

 
9.23

 
 
0.83

 
 
1,199,758

 
11.79

 
 
0.96

 
Over three to five years
1,267,179

 
13.78

 
 
1.91

 
 
1,552,188

 
16.09

 
 
2.33

 
 
1,677,391

 
16.48

 
 
2.56

 
Over five years
1,285

 
0.01

 
 
1.71

 
 
901

 
0.01

 
 
1.66

 
 
516

 
0.01

 
 
1.74

 
Jumbo
3,544

 
0.04

 
 
0.11

 
 
8,064

 
0.08

 
 
0.14

 
 
15,247

 
0.15

 
 
0.16

 
Total
2,282,038

 
24.81

 
 
1.27

 
 
2,959,631

 
30.68

 
 
1.48

 
 
3,598,297

 
35.36

 
 
1.53

 
Total deposits
$
9,198,892

 
100.00
%
 
 
0.41
%
 
 
$
9,646,305

 
100.00
%
 
 
0.53
%
 
 
$
10,176,704

 
100.00
%
 
 
0.62
%
 
 
(1)
Terms indicated are original, not term remaining to maturity.

The following table presents, by rate categories, the remaining periods to maturity of our certificates of deposit outstanding at December 31, 2015 and the balances of our certificates of deposit outstanding at December 31, 2015 , 2014 and 2013 .
 
Period to Maturity From December 31, 2015
 
At December 31,
(In Thousands)
Within
One Year
 
Over One
to
Two Years
Over Two
to
Three Years
Over
Three
Years
 
2015
 
2014
 
2013
Certificates of deposit rate categories:
 

 
 

 
 

 
 

 
 

 
 

 
 

0.49% or less
$
487,362

 
$
69,274

 
$
134

 
$

 
$
556,770

 
$
763,913

 
$
949,313

0.50% to 0.99%
52,406

 
65,060

 
30,957