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AF > SEC Filings for AF > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for ASTORIA FINANCIAL CORP

Form 10-Q for ASTORIA FINANCIAL CORP


7-Nov-2012

Quarterly Report


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 may be subject to circumstances beyond our control;

there may be increases in competitive pressure among financial institutions or from non-financial institutions;

changes in the interest rate environment may reduce interest margins or affect the value of our investments;

changes in deposit flows, loan demand or real estate values may adversely affect our business;

changes in accounting principles, policies or guidelines may cause our financial condition to be perceived differently;

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 may be less favorable than we currently anticipate;

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, may adversely affect our business;

transition of our regulatory supervisor from the Office of Thrift Supervision to the Office of the Comptroller of the Currency, or OCC, and the Board of Governors of the Federal Reserve Board, or the FRB;

effects of changes in existing U.S. government or government-sponsored mortgage programs;

          technological changes may be more difficult or expensive than we
anticipate;

          success or consummation of new business initiatives may be more

difficult or expensive than we anticipate; or

litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, may be determined adverse to us or may delay the occurrence or non-occurrence of events longer than we anticipate.

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


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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 association holding company of Astoria Federal. Our primary business is the operation of Astoria Federal. Astoria Federal's principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowings, primarily in residential mortgage loans, multi-family mortgage loans, commercial real estate loans and mortgage-backed securities. Our results of operations are dependent primarily on our net interest income, which is the difference between the interest earned on our assets, primarily our loan and securities portfolios, and the interest paid on our deposits and borrowings. 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.

As the premier Long Island community bank, our goals are to enhance shareholder value while building a solid banking franchise. We focus on growing our core businesses of mortgage portfolio lending and retail banking while maintaining strong asset quality and controlling operating expenses. We also provide returns to shareholders through dividends.

We are impacted by both national and regional economic factors. With residential mortgage loans from various regions of the country held in our portfolio, the condition of the national economy impacts our earnings. During 2011 and continuing into 2012, the U.S. economy has shown signs of a very slow and tenuous recovery from the recession which began in 2008. The national unemployment rate, while still at a high level, declined to 7.8% for September 2012, compared to a peak of 10.0% for October 2009, although new job growth remains slow. Softness in the housing and real estate markets persists, although the extent of such softness varies from region to region. While the trend of lower non-performing loans has continued during 2012, we expect the levels will remain somewhat elevated for some time, especially in certain states where judicial foreclosure proceedings are required. With respect to our multi-family mortgage loan origination activities, primarily focused in New York, we have observed favorable market conditions during the first nine months of 2012.

In addition to considering the challenging economic environment in which we compete, the regulation and oversight of our business changed during 2011. As described in more detail in Part I, Item 1A, "Risk Factors," in our 2011 Annual Report on Form 10-K, as supplemented by our March 31, 2012 and June 30, 2012 Quarterly Reports on Form 10-Q, certain aspects of the Reform Act have an impact on us, including the expanded regulatory burden resulting from oversight of Astoria Federal by the OCC and the Consumer Financial Protection Bureau and oversight of Astoria Financial Corporation by the FRB, as well as changes to, and significant increases in, deposit insurance assessments, the imposition of consolidated holding company capital requirements and the roll back of federal preemption applicable to certain of our operations. The FRB has issued notices of proposed rulemaking during 2012 that would subject all savings and loan holding companies, including Astoria Financial Corporation, to consolidated capital requirements. These proposed rules also would revise the quantity and quality of required minimum risk-based and leverage capital requirements, consistent with the Reform Act and the Basel III capital standards, and would revise the rules for calculating risk-weighted assets to


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enhance their risk sensitivity, which, among other things, would generally exclude trust preferred securities as a component of tier 1 capital. The proposed rules provide for various phase-in periods over the next several years. We are continuing to review the impact that the Reform Act, Basel III and related proposed rule-making will have on our business, financial condition and results of operations.

Net income for the three months ended September 30, 2012 increased compared to the three months ended September 30, 2011, reflecting a reduction of non-interest expense which more than offset a lower level of net interest income. For the nine months ended September 30, 2012, net income was lower in comparison to the nine months ended September 30, 2011. This decline was primarily attributable to a lower level of net interest income, coupled with an increase in non-interest expense.

Net interest income, the net interest rate spread and the net interest margin for the three and nine months ended September 30, 2012 were lower compared to the respective three and nine month periods in 2011, primarily due to more rapid declines in the yields on average interest-earning assets than the declines in the costs of average interest-bearing liabilities. On June 19, 2012, we completed the sale of $250.0 million aggregate principal amount of 5.00% senior unsecured notes due 2017, or 5.00% Senior Notes. The proceeds from the sale of the 5.00% Senior Notes were used to redeem our $250.0 million aggregate principal amount of 5.75% senior unsecured notes due October 2012, or 5.75% Senior Notes, on September 13, 2012. The repayment of the 5.75% Senior Notes and issuance of the 5.00% Senior Notes will result in a reduction of future annual interest expense with respect to our other borrowings. The short-term cost to carry the 5.00% Senior Notes until the 5.75% Senior Notes were repaid had the effect of reducing the 2012 third quarter net interest income and had a negative impact on the 2012 third quarter net interest margin of approximately nine basis points.

Interest income for the three months ended September 30, 2012 decreased compared to the three months ended September 30, 2011 primarily due to lower average yields on mortgage loans and mortgage-backed and other securities, partially offset by an increase in the average balance of multi-family and commercial real estate loans. For the nine months ended September 30, 2012, interest income decreased compared to the nine months ended September 30, 2011 primarily due to lower average yields on mortgage loans and mortgage-backed and other securities, coupled with a decline in the average balance of mortgage loans. Interest expense for the three and nine months ended September 30, 2012 also decreased in relation to the comparable 2011 periods, primarily due to decreases in interest expense on certificates of deposit and borrowings. The decreases in interest expense on certificates of deposit primarily reflect declines in the average balances of such accounts, although the average costs also declined. The declines in interest expense on borrowings were attributable to declines in the average costs of borrowings, offset by increases in the average balances.

The provision for loan losses for the 2012 third quarter totaled $9.5 million, resulting in a provision of $29.5 million for the first nine months of 2012, compared to $10.0 million for the 2011 third quarter and $27.0 million for the first nine months of 2011. The allowance for loan losses totaled $148.5 million at September 30, 2012, compared to $157.2 million at December 31, 2011. The decrease in the allowance for loan losses reflects the general stabilizing trend in overall asset quality we have experienced since 2010 as total delinquencies have continued a downward trend. The allowance for loan losses at September 30, 2012 reflects the composition and size of our loan portfolio, the levels and composition of our loan delinquencies and non-


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performing loans, our loss history and our evaluation of the housing and real estate markets and overall economy, including the unemployment rate and other factors.

Non-interest income for the three and nine months ended September 30, 2012 remained flat in comparison to the three and nine months ended September 30, 2011. Lower customer service fees in 2012 were offset by increased mortgage banking income, net, and, for the nine months ended September 30, 2012, a gain on sales of securities and an increase in other non-interest income.

Non-interest expense decreased for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and increased for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The decrease for the 2012 third quarter compared to the 2011 third quarter is primarily attributable to reduced compensation and benefits expense, partially offset by increases in Federal Deposit Insurance Corporation, or FDIC, insurance premium expense and other non-interest expense. The increase for the first nine months of 2012 over the first nine months of 2011 is primarily the result of increased FDIC insurance premium expense, other non-interest expense and occupancy, equipment and systems expense, which more than offset a decline in compensation and benefits expense. The reductions in compensation and benefits expense in the 2012 periods, compared to the 2011 periods, reflect, in part, the benefits resulting from our cost control initiatives implemented in the 2012 first quarter. The increases in other non-interest expense for the three and nine months ended September 30, 2012, over the comparable 2011 periods, include an early extinguishment of debt charge associated with the prepayment of the 5.75% Senior Notes.

Total assets increased slightly during the nine months ended September 30, 2012, primarily due to an increase in our mortgage loan portfolio which was substantially offset by a decline in our securities portfolio and a decrease in other assets. During the first nine months of 2012, mortgage loan origination and purchase volume exceeded loan repayments, resulting in growth in our mortgage loan portfolio. This growth was fueled by an increase in our multi-family and commercial real estate loan portfolio, reflecting the resumption of such lending in the latter half of 2011 and strong loan production during the first nine months of 2012. The residential mortgage loan portfolio declined during the nine months ended September 30, 2012 as mortgage loan repayments, which remain at elevated levels but did not accelerate in 2012, more than offset our origination and purchase volume. At September 30, 2012, our multi-family and commercial real estate portfolio represented 22% of our total loan portfolio, up from 18% at December 31, 2011. This reflects our focus on repositioning the asset mix of our balance sheet, concentrating more on higher yielding multi-family loans than on lower yielding residential loans.

Total deposits decreased during the nine months ended September 30, 2012 as a result of a decline in certificates of deposit, while low cost savings, money market and NOW and demand deposit accounts increased. At September 30, 2012, low cost savings, money market and NOW and demand deposit accounts represented 59% of total deposits, up from 51% at December 31, 2011. This reflects our efforts to reposition the liability mix of our balance sheet, reducing high cost certificates of deposit and increasing low cost savings, money market and NOW and demand deposit accounts.

Our borrowings portfolio increased during the nine months ended September 30, 2012. The increase was due to an increase in FHLB-NY advances, partially offset by a decline in reverse repurchase agreements. Excluding the newly issued 5.00% Senior Notes, during the nine months


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ended September 30, 2012 we extended $700.0 million of fixed rate, non-callable borrowings with a weighted average rate of 1.05% and a weighted average term of 3.8 years. During this period of historic low interest rates, we have utilized low cost borrowings to offset the decline in high cost certificates of deposit to help manage interest rate risk.

Stockholders' equity increased as of September 30, 2012 compared to December 31, 2011 due primarily to earnings for the nine months ended September 30, 2012 and a reduction in accumulated other comprehensive loss, partially offset by dividends declared. The reduction in accumulated other comprehensive loss is primarily the result of the adjustment in the 2012 first quarter to reflect the remeasurement of our benefit obligations and the funded status of our defined benefit pension plans at March 31, 2012 pursuant to plan amendments which, among other things, suspended the accrual of additional pension benefits effective April 30, 2012 and resulted in reduced pension costs beginning in the 2012 second quarter.

With the yield curve flattening further due to the Federal Reserve's extension of "Operation Twist" and the outlook for interest rates to remain at historic lows for some time, we continue to face challenges. This notwithstanding, we believe that our strong multi-family loan origination platform, coupled with our focus on repositioning the asset and liability mix of our balance sheet, will benefit the net interest margin and enhance future earnings.

On October 29, 2012, and continuing through October 30, 2012, the New York metropolitan area was hit by Hurricane Sandy, one of the most significant storm systems experienced in this area. As a result, we temporarily ceased all operations. Upon resumption of operations on October 31, 2012, certain of our branch locations were unable to re-open due to loss of power and other damage sustained and we experienced significant communication systems disruptions. Although we have since resumed operations in substantially all operating locations, we are continuing to assess and recover from the damage resulting from the storm. Repair and recovery costs could be significant. We cannot at this time assess the impact that this storm may have on our borrowers or on the related collateral for loans.

Available Information

Our internet website address is www.astoriafederal.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.astoriafederal.com. The above reports are available on our website immediately after they are electronically filed with or furnished to the SEC. Such reports are also available on the SEC's website at www.sec.gov/edgar/searchedgar/webusers.htm.

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