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AF > SEC Filings for AF > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for ASTORIA FINANCIAL CORP

Form 10-Q for ASTORIA FINANCIAL CORP


7-Aug-2013

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;

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 exploring the selective expansion of 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 shown signs of modest improvement, the operating environment continues to remain challenging. Interest rates are expected to remain at or near historic lows for the near term, although long-term rates increased somewhat during the latter part of the 2013 second quarter, with the ten year U.S. Treasury rate increasing from 1.63% at May 1, 2013 to 2.49% at the end of June. The national unemployment rate, while remaining high, declined to 7.6% for June 2013, compared to a peak of 10.0% for October 2009, and new job growth, while remaining slow, has continued in 2013. 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 believe market conditions remain favorable.

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, as supplemented by this report, certain aspects of the Reform Act continue to have a significant impact on us. In July 2013, the federal bank regulatory agencies, or the Agencies, approved rules that will subject many savings and loan holding companies, including Astoria Financial Corporation, to consolidated capital requirements which will be phased in with the initial provisions effective for us on January 1, 2015. The rules also revise the quantity and quality of required minimum risk-based and leverage capital requirements applicable to Astoria Federal and Astoria Financial Corporation and revise the calculation of risk-weighted assets to enhance their risk sensitivity. We continue to review and prepare for the impact that the Reform Act, the Third Basel Accord adopted by the Basel Committee on Banking Supervision, or Basel III, capital standards and related rulemaking will have on our business, financial condition and results of operations.

Net income available to common shareholders for the three months ended June 30, 2013 was approximately the same as that for the three months ended June 30, 2012, as increased net income was offset by our first quarterly dividend declared on our preferred stock in the 2013 second quarter. See Note 6 of Notes to Consolidated Financial Statements in Part I, Item 1,


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"Financial Statements (Unaudited)," for additional information on the issuance of the preferred stock. The increase in net income for the three months ended June 30, 2013, compared to the three months ended June 30, 2012, reflects a lower provision for loan losses and higher non-interest income, partially offset by an increase in non-interest expense and a reduction in net interest income. For the six months ended June 30, 2013, net income available to common shareholders increased compared to the six months ended June 30, 2012. This increase reflects an increase in net income, partially offset by the preferred stock dividend declared in the 2013 second quarter. The increase in net income for the six months ended June 30, 2013, compared to the six months ended June 30, 2012, reflects reductions in non-interest expense and provision for loan losses and an increase in non-interest income, partially offset by lower net interest income.

Net interest income for the three and six months ended June 30, 2013 was lower compared to the three and six months ended June 30, 2012, reflecting declines in interest income which exceeded the declines in interest expense. The declines in interest income primarily reflect declines in the average yields on interest-earning assets and decreases in the average balances of residential mortgage loans, partially offset by increases in the average balances of multi-family and commercial real estate mortgage loans for the three and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012. The declines in interest expense were primarily due to declines in the average costs of interest-bearing liabilities, coupled with decreases in the average balances of certificates of deposit and borrowings for the three and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012. The net interest rate spread and the net interest margin each increased eight basis points for the 2013 second quarter compared to the 2012 second quarter and each increased three basis points for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. These increases in the net interest rate spread and the net interest margin are primarily due to the restructuring of $1.15 billion of borrowings resulting in a 90 basis point decline in their weighted average cost at the time of restructuring, which is more fully described in "Liquidity and Capital Resources," and the prepayment of our 9.75% Junior Subordinated Debentures during the 2013 second quarter. See Note 5 of Notes to Consolidated Financial Statements in Part I, Item 1, "Financial Statements (Unaudited)," for additional information on the prepayment of the Junior Subordinated Debentures.

The provision for loan losses for the 2013 second quarter totaled $4.5 million resulting in a provision of $13.7 million for the first half of 2013, compared to $10.0 million for the 2012 second quarter and $20.0 million for the first half of 2012. The decline in the provision for loan losses is a reflection of the improvement in net loan charge-offs and total delinquent and non-performing loans during the 2013 second quarter and the contraction of the overall loan portfolio. The allowance for loan losses totaled $143.9 million at June 30, 2013, compared to $145.5 million at December 31, 2012. While the level of loans past due 90 days or more has continued its downward trend during the first six months of 2013, 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 June 30, 2013 compared to December 31, 2012. This increase was primarily attributable to the addition of bankruptcy loans discharged prior to 2012 which were current or less than 90 days past due, which totaled $51.5 million at June 30, 2013, to non-performing loans. Effective 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.


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Non-interest income increased for the 2013 second quarter compared to the 2012 second quarter primarily due to a gain on sales of securities in 2013 and higher mortgage banking income, net. For the six months ended June 30, 2013, non-interest income also increased, in relation to the comparable 2012 period, although lower customer service fees partially offset higher mortgage banking income, net.

Non-interest expense for the 2013 second quarter increased compared to the 2012 second quarter. This increase includes the prepayment charge for the early extinguishment of our Junior Subordinated Debentures and increased compensation and benefits expense, partially offset by lower federal deposit insurance premium expense and other non-interest expense. For the six months ended June 30, 2013, non-interest expense decreased compared to the six months ended June 30, 2012. This decline reflects lower compensation and benefits expense, federal deposit insurance premium expense and other non-interest expense, partially offset by an increase in occupancy, equipment and systems expense.

Total assets declined during the six months ended June 30, 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 June 30, 2013, our multi-family and commercial real estate mortgage loan portfolio represented 30% of our total loan portfolio, up from 24% at December 31, 2012, as we continue to reposition the asset mix of our balance sheet. 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 first six months of 2013. With historic low interest rates for thirty year fixed rate conforming mortgage loans, which we do not retain for our portfolio, such loans continue to be a more attractive alternative for borrowers than the hybrid ARM loan product that we retain for our portfolio. Our residential mortgage loan origination and purchase volume continues to be negatively affected by this interest rate environment.

Total liabilities declined during the six months ended June 30, 2013, primarily due to a decrease in our borrowings portfolio reflecting the reduction in total assets, coupled with a decline in total deposits. The decline in our borrowings portfolio reflects a decline in FHLB-NY advances and the prepayment of our Junior Subordinated Debentures, partially offset by our use of short-term federal funds purchased in 2013. Total deposits decreased during the six months ended June 30, 2013 as a result of a decline in certificates of deposit, partially offset by a net increase in core deposits, consisting of low cost savings, money market and NOW and demand deposit accounts. At June 30, 2013, core deposits represented 65% of total deposits, up from 62% at December 31, 2012, and included $630.7 million of business deposits, an increase of 29% since December 31, 2012. The expansion of our business banking operations, which is a critical component of our strategic shift in the balance sheet, continues to facilitate growth in core deposits.

Stockholders' equity increased as of June 30, 2013 compared to December 31, 2012. The increase was primarily attributed to the issuance of the preferred stock in the 2013 first quarter and net income for the first six months of 2013, partially offset by dividends on common and preferred stock.

While the operating environment remains challenging, we are encouraged by the recent steepening of the yield curve as reflected by an increase in long-term mortgage loan interest rates. Should long-term mortgage loan interest rates continue to trend higher, there is a potential


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for a slowdown in residential mortgage loan and mortgage-backed securities prepayments and a stabilization of our residential loan portfolio in the latter half of 2013. Our focus continues to be on the strategic shift in our balance sheet through the repositioning of assets and liabilities. We will continue to concentrate on growing our multi-family and commercial real estate mortgage loan portfolio, reducing certificates of deposit and increasing core deposits, which should positively impact the net interest margin. We are pleased with the strength of our multi-family and commercial real estate loan production and pipeline as well as the strong growth in business deposits in 2013. We look forward to this growth continuing in the future as we plan to add new team members in the business banking group over the coming months.

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 as soon as reasonably practicable after we file such material with, or furnish such material to, the SEC. Such reports are also available on the SEC's website at www.sec.gov/edgar/searchedgar/webusers.htm.

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