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AF > SEC Filings for AF > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for ASTORIA FINANCIAL CORP

Form 10-Q for ASTORIA FINANCIAL CORP


6-Nov-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 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 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. During the 2013 third quarter, we opened our first business banking office in midtown Manhattan and continue to look for other prime locations to open our first branch in Manhattan from which to better serve and build our business banking relationships.

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 historic lows and we expect them to remain low for the near term. However, long-term interest rates moved higher during the latter part of the 2013 second quarter and into the 2013 third 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 and 2.61% at the end of September. The national unemployment rate, while remaining high, declined to 7.2% for September 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. However, we believe market conditions remain favorable in the New York metropolitan area with respect to our multi-family mortgage loan origination activities.

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 Part II, Item 1A, "Risk Factors," in our June 30, 2013 Quarterly Report on Form 10-Q, 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.


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Net income available to common shareholders for the three and nine months ended September 30, 2013 increased compared to the three and nine months ended September 30, 2012, reflecting increases in net income which were offset in part by dividends declared on our preferred stock, which was issued in the 2013 first quarter. The increase in net income for the three months ended September 30, 2013, compared to the three months ended September 30, 2012, primarily reflects a lower provision for loan losses, partially offset by a reduction in non-interest income. The increase in net income for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, was primarily attributable to a decline in the provision for loan losses and a reduction in non-interest expense, partially offset by lower net interest income.

Net interest income for the three months ended September 30, 2013 increased slightly compared to the three months ended September 30, 2012 due to a slightly greater reduction in interest expense than the decline in interest income. For the nine months ended September 30, 2013, a decline in interest income exceeded a decline in interest expense, resulting in lower net interest income compared to the nine months ended September 30, 2012. The continued low interest rate environment, coupled with the restructuring of $1.35 billion of borrowings in the 2013 second and third quarters and the prepayment of our Junior Subordinated Debentures in the 2013 second quarter, has resulted in the average cost of interest-bearing liabilities declining more than the average yield on interest-earning assets and an improvement in our net interest rate spread for the three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012. The restructuring of borrowings in 2013 resulted in a 94 basis point decline in the weighted average rate on such borrowings. For the 2013 third quarter, the decline in the average cost of interest-bearing liabilities more than offset the impact of the decline in the average balance of interest-earning assets, resulting in the slight improvement in net interest income compared to the 2012 third quarter. This improvement in the 2013 third quarter had the impact of lessening the decline in net interest income for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The net interest margin also increased for the 2013 third quarter and nine months ended September 30, 2013 compared to the 2012 third quarter and nine months ended September 30, 2012.

The provision for loan losses for the 2013 third quarter totaled $2.5 million resulting in a provision for loan losses of $16.2 million for the nine months ended September 30, 2013, compared to $9.5 million for the 2012 third quarter and $29.5 million for the nine months ended September 30, 2012. The decline in the provision for loan losses reflects the continued improvement in net loan charge-offs and delinquent and non-performing loans during the 2013 third quarter, as well as the contraction of the overall loan portfolio. The allowance for loan losses totaled $143.0 million at September 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 nine 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 September 30, 2013 compared to December 31, 2012. This increase was primarily attributable to the inclusion of bankruptcy loans discharged prior to 2012 which were current or less than 90 days past due, which totaled $49.9 million at September 30, 2013, as 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


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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.

Non-interest income decreased for the 2013 third quarter compared to the 2012 third quarter primarily due to decreases in customer service fees and income from bank owned life insurance. For the nine months ended September 30, 2013, non-interest income increased slightly, in relation to the comparable 2012 period, as higher mortgage banking income, net, was substantially offset by lower customer service fees, income from bank owned life insurance, gain on sales of securities and other loan fees.

Non-interest expense for the 2013 third quarter was essentially the same as the 2012 third quarter primarily due to lower federal deposit insurance premium expense in 2013 and an extinguishment of debt expense recorded in the 2012 third quarter, the effects of which were substantially offset by increased compensation and benefits expense and other non-interest expense. For the nine months ended September 30, 2013, non-interest expense decreased compared to the nine months ended September 30, 2012. This decline reflects lower federal deposit insurance premium expense, compensation and benefits expense and other non-interest expense, partially offset by increases in occupancy, equipment and systems expense and extinguishment of debt expense.

Total assets declined during the nine months ended September 30, 2013, primarily 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 September 30, 2013, our multi-family and commercial real estate mortgage loan portfolio represented 32% of our total loan portfolio, up from 24% at December 31, 2012, reflecting our continued focus on the strategic shift in 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 nine months of 2013. With historic low interest rates for thirty year fixed rate conforming mortgage loans, which we generally do not retain for our portfolio, such loans continue to be a more attractive alternative for borrowers than the hybrid adjustable rate mortgage 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 deposits decreased during the nine months ended September 30, 2013 as a result of a decline in certificates of deposit, partially offset by a net increase in our core deposits, reflecting increases in money market and NOW and demand deposit accounts which more than offset a decline in savings accounts. At September 30, 2013, core deposits represented 66% of total deposits, up from 62% at December 31, 2012. Total deposits included $689.6 million of business deposits at September 30, 2013, an increase of 41% since December 31, 2012, 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. Total borrowings declined since December 31, 2012 reflecting 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.

Stockholders' equity increased as of September 30, 2013 compared to December 31, 2012. The increase was primarily attributed to the issuance of the preferred stock in the 2013 first quarter


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and net income for the first nine months of 2013, partially offset by dividends on common and preferred stock.

While the operating environment continues to remain challenging, we are encouraged by the steepening of the yield curve over the last several months which we believe will have positive effects. We believe higher long-term interest rates should make our residential hybrid ARM loan products more attractive to borrowers and should lead to a continued slowdown of residential loan prepayments, which we have already experienced near the end of the 2013 third quarter. We believe these factors should lead to a stabilization of our residential mortgage loan portfolio and growth in the total loan portfolio. A sustained reduction in loan prepayments would also lead to a reduction in the premium amortization expense associated with the loans providing us with yet an additional benefit. Our focus continues to be on the strategic shift in our balance sheet through the repositioning of assets and liabilities. We continue to concentrate on growing our multi-family and commercial real estate mortgage loan portfolio, reducing certificates of deposit and increasing core deposits, all of which should continue to positively impact the net interest margin. We expect to continue to add new team members to our business banking operations as well as strategically located new branches from which to service our customers 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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