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AF > SEC Filings for AF > Form 10-Q on 8-May-2013All Recent SEC Filings

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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, 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;
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;
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. As the premier Long Island community bank, our goals are to enhance shareholder value while continuing to build 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 have been developing strategies to grow other loan categories to diversify earning assets and to increase low cost core deposits. These strategies include a greater level of participation in the multi-family and commercial real estate mortgage lending markets and, over time, expanding our array of business banking products and services, focusing on small and mid-sized businesses with an emphasis on attracting clients from larger competitors. We are also considering expanding our branch network into Manhattan and additional locations on Long Island.

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 begun showing signs of improvement, the operating environment continues to remain challenging. Interest rates are expected to remain at historic lows for the near term. The national unemployment rate, while still at a high level, declined to 7.6% for March 2013, compared to a peak of 10.0% for October 2009, and new job growth, while remaining slow, continued during the 2013 first quarter. Softness persists in the housing and real estate markets, although the extent of such softness varies from region to region. With respect to our multi-family mortgage loan origination activities, primarily focused in New York, we continue to observe favorable market conditions.

In addition to the challenging economic environment in which we compete, the regulation and oversight of our business has changed significantly in recent years. As described in more detail in Part I, Item 1A, "Risk Factors," in our 2012 Annual Report on Form 10-K, certain aspects of the Reform Act continue to have a significant impact on us, including the expanded regulatory burden resulting from oversight of Astoria Federal by the OCC and the CFPB and oversight of Astoria Financial Corporation by the FRB, as well as changes to, and significant increases in, federal deposit insurance premiums, the imposition of consolidated holding company capital requirements and the roll back of federal preemption applicable to certain of our operations. The FRB issued notices of proposed rulemaking during 2012 that would subject all savings and loan holding companies, including Astoria Financial Corporation, to consolidated capital requirements. Although implementation of the rules has been delayed, we are continuing to review and prepare for the impact that the Reform Act, Basel III capital standards and related proposed rulemaking will have on our business, financial condition and results of operations.

Net income for the three months ended March 31, 2013 increased compared to the three months ended March 31, 2012, reflecting a reduction of non-interest expense which more than offset lower net interest income and non-interest income.

Net interest income for the three months ended March 31, 2013 was lower compared to the three months ended March 31, 2012, as a decrease in interest income exceeded a decline in interest

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expense. The net interest rate spread and the net interest margin each declined just one basis point for the 2013 first quarter compared to the 2012 first quarter. These changes reflect a more rapid decline in the yields on average interest-earning assets than the decline in the costs of average interest-bearing liabilities. The lower level of interest income for the three months ended March 31, 2013, compared to the three months ended March 31, 2012, primarily reflects the decline in the average yield on interest-earning assets. In addition, decreases in the average balances of residential mortgage loans and mortgage-backed and other securities resulted in a reduction in interest income which was substantially offset by the additional interest income resulting from an increase in the average balance of our multi-family and commercial real estate mortgage loan portfolio. The decline in interest expense for the three months ended March 31, 2013, compared to the three months ended March 31, 2012, is primarily due to the decrease in the average cost of interest-bearing liabilities, coupled with a decline in the average balance of certificates of deposit.

The provision for loan losses for the 2013 first quarter totaled $9.1 million, compared to $10.0 million for the 2012 first quarter. The allowance for loan losses totaled $144.3 million at March 31, 2013, compared to $145.5 million at December 31, 2012. The slight decline 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 to decline. While the level of loans past due 90 days or more has continued its downward trend in the 2013 first quarter, we expect the levels will remain somewhat elevated for some time, especially in certain states where judicial foreclosure proceedings are required. Notwithstanding the decline in total delinquencies, our non-performing loans increased as of March 31, 2013 as compared to December 31, 2012. This increase is primarily attributable to the addition of bankruptcy loans discharged prior to 2012 which are current or less than 90 days past due totaling $54.3 million. In the 2013 first quarter, in addition to bankruptcy loans placed on non-accrual status and reported as non-performing loans as of December 31, 2012, we also included bankruptcy loans discharged prior to 2012 regardless of the delinquency status of the loans. Such loans continue to generate interest income on a cash basis as payments are received. The allowance for loan losses at March 31, 2013 reflects the composition and size of our loan portfolio, the levels and composition of loan delinquencies and non-performing loans, our loss history and our evaluation of the housing and real estate markets and the current economic environment.

Non-interest income decreased for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. This decline is primarily due to gain on sales of securities in the 2012 first quarter and lower customer service fees in the 2013 first quarter compared to 2012, partially offset by an increase in mortgage banking income, net.

Non-interest expense decreased for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. This decline largely relates to the impact of our cost control initiatives implemented in 2012 resulting in lower compensation and benefits expense, coupled with lower other non-interest expense and federal deposit insurance premium expense. Non-interest expense for the three months ended March 31, 2013 also includes a reduction in compensation and benefits expense related to changes in certain compensation policies which became effective January 1, 2013, and an increase in occupancy, equipment and systems expense resulting from a one-time charge to conform to a straight-line basis the rental expense on operating leases for certain branch locations.

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Total assets declined during the three months ended March 31, 2013, reflecting a decrease in our residential mortgage loan portfolio which was partially offset by increases in our multi-family and commercial real estate mortgage loan portfolio and our securities portfolio. At March 31, 2013, our multi-family and commercial real estate mortgage loan portfolio represented 26% of our total loan portfolio, up from 24% at December 31, 2012. This reflects our focus on repositioning the asset mix of our balance sheet, concentrating more on multi-family loans than on residential loans. The decrease in our residential mortgage loan portfolio is the result of continued elevated levels of mortgage loan repayments which exceeded our origination and purchase volume in the 2013 first quarter. Historic low interest rates for thirty year fixed rate conforming mortgage loans continue, thereby making the hybrid ARM loan product less attractive to borrowers. Our residential mortgage loan origination and purchase volume continues to be negatively affected by this interest rate environment.

Total liabilities declined during the three months ended March 31, 2013, primarily due to a decrease in our borrowings portfolio. Total deposits increased slightly during the three months ended March 31, 2013 as a result of a net increase in core deposits, consisting of low cost savings, money market and NOW and demand deposit accounts, more than offsetting a decline in certificates of deposit. At March 31, 2013, total deposits include $563.1 million of business deposits, an increase of 15% since December 31, 2012, reflecting the expansion of our business banking initiatives which continue to facilitate growth in our core deposits by generating new core relationships within the community and deepening our existing relationships. At March 31, 2013, low cost core deposits represented 64% of total deposits, up from 62% at December 31, 2012, and total deposits increased to 73% of total interest-bearing liabilities at March 31, 2013, up from 70% at December 31, 2012.

Stockholders' equity increased as of March 31, 2013 compared to December 31, 2012. The increase was primarily attributed to the issuance of preferred stock in the 2013 first quarter, the net proceeds from which will be used toward the prepayment, scheduled to occur on May 10, 2013, of our 9.75% Junior Subordinated Debentures. See Note 5 of Notes to Consolidated Financial Statements in Part I, Item 1, "Financial Statements (Unaudited)" for additional information on the issuance of the preferred stock and see Note 12 for additional information on the scheduled prepayment of the 9.75% Junior Subordinated Debentures.

We continue to operate in a challenging economic and regulatory environment. We will continue to concentrate on growing the multi-family and commercial real estate mortgage loan portfolio and increasing low cost core deposits. We are encouraged by the success we have achieved on both sides of the balance sheet, which is reflected in the levels of our multi-family and commercial real estate mortgage loan originations during the 2013 first quarter and the significant increase in the pipeline for such loans as of March 31, 2013, compared to December 31, 2012, as well as the growth in retail and business core deposits during the 2013 first quarter. We look forward to this growth continuing in the future which should help in our efforts to maintain the net interest margin for 2013 slightly higher than the margin for the year ended December 31, 2012.

Available Information

Our internet website address is 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

Table of Contents The above reports are available on our website as soon as reasonably practicable after we file such material with, or furnish such material to, the SEC. Such reports are also available on the SEC's website at

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