Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AF > SEC Filings for AF > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for ASTORIA FINANCIAL CORP

Form 10-K for ASTORIA FINANCIAL CORP


27-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this report.

Executive Summary

The following overview should be read in conjunction with our MD&A in its entirety.

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 continue to implement our 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 middle market businesses with an emphasis on attracting clients from larger competitors. We continue to explore opportunities to selectively expand our physical presence, consisting presently of our branch network of 85 locations plus our dedicated business banking office in midtown Manhattan, into other prime locations in Manhattan and on Long Island 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. Long-term interest rates moved higher during the latter part of the 2013 second quarter and into the remainder of 2013, with the ten-year U.S. Treasury rate increasing from 1.63% at May 1, 2013 to 3.03% at the end of December. The national unemployment rate declined to 6.7% for December 2013 compared to 7.9% for December 2012, 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. 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," certain aspects of the Reform Act continue to have a significant impact on us. In July 2013, the Agencies approved the Final Capital 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 prepare for the impacts that the Reform Act, 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 year ended December 31, 2013 increased compared to the year ended December 31, 2012, reflecting the benefits resulting from reductions in provision for loan losses and operating expense, partially offset by reduced net interest income and non-interest income.

For the year ended December 31, 2013, a decline in interest income exceeded a decline in interest expense, resulting in lower net interest income compared to the year ended December 31, 2012. The decline in interest income reflected lower average yields on mortgage loans and mortgage-backed and


Table of Contents

other securities and a decline in the average balance of residential mortgage loans, partially offset by an increase in the average balance of multi-family and commercial real estate mortgage loans. The decline in interest expense was primarily attributable to declines in both the average costs and average balances of borrowings and certificates of deposit. The net interest margin and net interest rate spread for the year ended December 31, 2013 each increased compared to the year ended December 31, 2012. The continued low interest rate environment, coupled with the restructuring of $1.35 billion of borrowings and the prepayment of our junior subordinated debentures during 2013, 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 year ended December 31, 2013 compared to the year ended December 31, 2012.

The provision for loan losses for the year ended December 31, 2013 totaled $19.6 million, compared to $40.4 million for the year ended December 31, 2012. The decline in the provision for loan losses reflects the continued improvement in the levels of net loan charge-offs and delinquent loans, as well as the contraction of the overall loan portfolio. The allowance for loan losses totaled $139.0 million at December 31, 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 throughout 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 December 31, 2013 compared to December 31, 2012. This increase was primarily attributable to the inclusion of bankruptcy loans which were current or less than 90 days past due, which totaled $61.0 million at December 31, 2013 and $5.7 million at December 31, 2012, as non-performing loans in 2013. Such loans continue to generate interest income on a cash basis as payments are received.

Non-interest income was lower in 2013 compared to 2012 primarily due to a decline in gain on sales of securities and lower customer service fees, partially offset by higher mortgage banking income, net, including a partial recovery of the impairment valuation allowance on our mortgage servicing rights asset. The decline in gain on sales of securities resulted from the 2012 sale of Astoria Federal's entire position in Freddie Mac perpetual preferred securities.

Non-interest expense declined in 2013 compared to 2012 reflecting lower federal deposit insurance premium expense, compensation and benefits expense, primarily pension related, and other non-interest expense, partially offset by increases in occupancy, equipment and systems expense and extinguishment of debt expense. Included in our 2012 compensation and benefits expense were net charges totaling $5.6 million associated with cost control initiatives implemented in the 2012 first quarter. As a part of those initiatives, our defined benefit pension plans were amended in 2012 which resulted in a significant reduction in net periodic pension cost in subsequent periods. As we continue to execute our plan, we anticipate selective investment and increases in expense levels as a result.

Total assets declined during the year ended December 31, 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 December 31, 2013, our multi-family and commercial real estate mortgage loan portfolio represented 33% 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 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 ARM loan product that we retain for our portfolio. However, as longer-term interest rates moved higher in 2013, we began to experience a reduction in the levels of residential mortgage loan prepayments near the end of the 2013 third quarter which continued into the 2013 fourth quarter.


Table of Contents

Total deposits declined during the year ended December 31, 2013 as a result of a decline in certificates of deposit, slightly offset by a net increase in our core deposits, reflecting an increase in money market accounts which more than offset a decline in savings accounts. At December 31, 2013, core deposits represented 67% of total deposits, up from 62% at December 31, 2012. Total deposits included $650.1 million of business deposits at December 31, 2013, an increase of 32% 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.

Our borrowings portfolio decreased during the year ended December 31, 2013 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. The decrease in borrowings, coupled with the growth in business deposits and decrease in certificates of deposit are a reflection of our continuing efforts to reposition the mix of liabilities on our balance sheet.

Stockholders' equity increased as of December 31, 2013 compared to December 31, 2012. This increase included the issuance of preferred stock in the 2013 first quarter, net income for 2013 and a decline in accumulated other comprehensive loss, reflective of an improvement in the funded status of our defined benefit pension plans and other postretirement benefit plan at December 31, 2013 compared to December 31, 2012, partially offset by dividends on common and preferred stock. The issuance of the preferred stock and the redemption of our junior subordinated debentures will benefit our regulatory capital position when we become subject to consolidated capital requirements in January 2015.

Our strategy to strengthen and expand our position as a full service community bank is taking hold. We have continued in 2013 to strategically reposition our balance sheet, growing our multi-family and commercial real estate mortgage loan portfolio and low cost core deposits. As we move forward we will continue to execute this strategy to further diversify our balance sheet and improve our net interest margin. Business banking will remain a focus and we expect to open our first full-service branch in Manhattan by the end of the 2014 first quarter. In addition, we plan to open additional full-service branches in prime locations within our market from which to better serve our business banking clients as opportunities present themselves going forward. We anticipate that our net interest margin in 2014 will be higher than the 2.25% net interest margin we achieved in 2013. We believe we will experience a growth in earning assets in 2014 as the contraction we have witnessed over the past several years in the residential mortgage loan portfolio continues to slow down and the growth in our multi-family and commercial real estate mortgage loan portfolio resulting from new originations starts to outpace the shrinkage resulting from prepayments.

Critical Accounting Policies

Note 1 of Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data" contains a summary of our significant accounting policies. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Our policies with respect to the methodologies used to determine the allowance for loan losses, the valuation of MSR, judgments regarding goodwill and securities impairment and the estimates related to our pension plans and other postretirement benefits are our most critical accounting policies because they are important to the presentation of our financial condition and results of operations, involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions and estimates about highly uncertain matters. Actual results may differ from our assumptions, estimates and judgments. The use of different assumptions, estimates and judgments could result in material differences in our results of operations or financial condition. These critical accounting policies are reviewed quarterly with the Audit Committee of our Board of Directors.

The following is a description of these critical accounting policies and an explanation of the methods and assumptions underlying their application.


Table of Contents

Allowance for Loan Losses

We establish and maintain an allowance for loan losses based on our evaluation of the probable inherent losses in our loan portfolio. The allowance is increased by provisions for loan losses charged to earnings and is decreased by loan charge-offs in the period the loans, or portions thereof, are deemed uncollectible. Recoveries of amounts previously charged-off increase the allowance for loan losses in the period they are received. The allowance for loan losses is determined based on a comprehensive analysis of our loan portfolio. We evaluate the adequacy of the allowance on a quarterly basis. The allowance is comprised of both valuation allowances related to individual loans and general valuation allowances, although the total allowance for loan losses is available for losses applicable to the entire loan portfolio. In estimating specific allocations of the allowance, we review loans deemed to be impaired and measure impairment losses based on either the fair value of the collateral, the present value of expected future cash flows, or the observable market price of the loan. A loan is considered impaired when, based upon current information and events, it is probable that 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 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 the present value of the discounted cash flows of a modified loan or, for collateral dependent loans, the portion of the recorded investment in the loan in excess of the estimated fair value of the underlying collateral less estimated selling costs, is charged-off.

Loan reviews are performed by our Asset Review Department quarterly for all loans individually classified by our Asset Classification Committee and are performed annually for multi-family and commercial real estate mortgage loans modified in a TDR, multi-family and commercial real estate mortgage loans with balances of $5.0 million or greater and commercial loans with balances of $500,000 or greater. Further, multi-family and commercial real estate portfolio management personnel also perform annual reviews for certain multi-family and commercial real estate mortgage loans with balances under $5.0 million and recommend further review by our Credit and Asset Review Departments as appropriate. In addition, our Asset Review Department will review annually borrowing relationships whose combined outstanding balance is $5.0 million or greater, with such reviews covering approximately fifty percent of the outstanding principal balance of the loans to such relationships.

Our 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. 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 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.


Table of Contents

Other current and anticipated economic conditions on which our individual valuation allowances rely are the impact that national and/or local economic and business conditions may have on borrowers, the impact that local real estate markets may have on collateral values, the level and direction of interest rates and their combined effect on real estate values and the ability of borrowers to service debt. For multi-family and commercial real estate loans, additional factors specific to a borrower or the underlying collateral are considered. These factors include, but are not limited to, the composition of tenancy, occupancy levels for the property, location of the property, cash flow estimates and, to a lesser degree, the existence of personal guarantees. We also review all regulatory notices, bulletins and memoranda with the purpose of identifying upcoming changes in regulatory conditions which may impact our calculation of individual valuation allowances. Our primary banking regulator periodically reviews our reserve methodology during regulatory examinations and any comments regarding changes to reserves or loan classifications are considered by management in determining valuation allowances.

The determination of the loans on which full collectibility is not reasonably assured, the estimates of the fair value of the underlying collateral and the assessment of economic and regulatory conditions are subject to assumptions and judgments by management. Individual valuation allowances and charge-off amounts could differ materially as a result of changes in these assumptions and judgments.

Estimated losses for loans that are not individually deemed to be impaired are determined on a loan pool basis using our historical loss experience and various other qualitative factors and comprise our general valuation allowances. General valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with our lending activities which, unlike individual valuation allowances, have not been allocated to particular loans. The determination of the adequacy of the general valuation allowances takes into consideration a variety of factors.

We segment our residential mortgage loan portfolio by interest-only and amortizing loans, full documentation and reduced documentation loans and year of origination and analyze our historical loss experience and delinquency levels and trends of these segments. We analyze multi-family and commercial real estate mortgage loans by portfolio, geographic location and year of origination. We analyze our consumer and other loan portfolio by home equity lines of credit, commercial loans, revolving credit lines and installment loans and perform similar historical loss analyses. In our analysis of non-performing loans, we consider our aggregate historical loss experience with respect to the ultimate disposition of the underlying collateral along with the migration of delinquent loans based on the portfolio segments noted above. These analyses and the resulting loss rates are used as an integral part of our judgment in developing estimated loss percentages to apply to the loan portfolio segments. 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 that we monitor credit risk on all interest-only hybrid ARM loans. We monitor interest rate reset dates of our loan portfolio, in the aggregate, and the current interest rate environment and consider the impact, if any, on borrowers' ability to continue to make timely principal and interest payments in determining our allowance for loan losses. We also consider the size, composition, risk profile and delinquency levels of our loan portfolio, as well as our credit administration and asset management procedures. We monitor property value trends in our market areas by reference to various industry and market reports, economic releases and surveys, and our general and specific knowledge of the real estate markets in which we lend, in order to determine what impact, if any, such trends may have on the level of our general valuation allowances. In addition, we evaluate and consider the impact that current and anticipated economic and market conditions may have on the loan portfolio and known and inherent risks in the portfolio. We update our analyses quarterly and continually refine our evaluations as experience provides clearer guidance, our product offerings change and as economic conditions evolve.

We analyze our historical loss experience over twelve, fifteen, eighteen and twenty-four month periods. The loss history used in calculating our quantitative allowance coverage percentages varies based on loan type. Also, for a particular loan type we may not have sufficient loss history to develop a reasonable estimate of loss and consider our loss experience for other, similar loan types and may evaluate those


Table of Contents

losses over a longer period than two years. Additionally, multi-family and commercial real estate loss experience may be adjusted based on the composition of the losses (loan sales, short sales and partial charge-offs). Our evaluation of loss experience factors considers trends in such factors over the prior two years for substantially all of the loan portfolio, with the exception of multi-family and commercial real estate mortgage loans originated after 2010, for which our evaluation includes detailed modeling techniques. We update our historical loss analyses quarterly and evaluate the need to modify our quantitative allowances as a result of our updated charge-off and loss analyses.

We consider qualitative factors with the purpose of assessing the adequacy of the overall allowance for loan losses as well as the allocation of the allowance for loan losses by portfolio. The qualitative factors we consider generally include, but are not limited to, changes in (1) lending policies and procedures,
(2) economic and business conditions and developments that affect collectibility of our loan portfolio, (3) the nature and volume of our loan portfolio and in the terms of loans, (4) the experience, ability and depth of lending management and other staff, (5) the volume and severity of past due, non-accrual and adversely classified loans, (6) the quality of the loan review system, (7) the value of underlying collateral, (8) the existence or effect of any credit concentrations and (9) external factors such as competition and legal or regulatory requirements. In addition to the nine qualitative factors noted, we also review certain analytical information such as our coverage ratios and peer analysis.

We use ratio analyses as a supplemental tool for evaluating the overall reasonableness of the allowance for loan losses. As such, we consider our asset quality ratios as well as the allowance ratios and coverage percentages set forth in both peer group and regulatory agency data. We also consider any comments from our primary banking regulator resulting from their review of our general valuation allowance methodology during regulatory examinations. We consider the observed trends in our asset quality ratios in combination with our primary focus on our historical loss experience and the impact of current economic conditions. After evaluating these variables, we determine appropriate allowance coverage percentages for each of our portfolio segments and the appropriate level of our allowance for loan losses. We do not determine the appropriate level of our allowance for loan losses based exclusively on a single factor or asset quality ratio. We periodically review the actual performance and charge-off history of our loan portfolio and compare that to our previously determined allowance coverage percentages and individual valuation allowances. In doing so, we evaluate the impact the previously mentioned variables may have had on the loan portfolio to determine which changes, if any, should be made to our assumptions and analyses.

Allowance adequacy calculations are adjusted quarterly, based on the results of our quantitative and qualitative analyses, to reflect our current estimates of the amount of probable losses inherent in our loan portfolio in determining our allowance for loan losses. Allocations of the allowance to each loan category are adjusted quarterly to reflect probable inherent losses using the same quantitative and qualitative analyses used in connection with the overall allowance adequacy calculations. The portion of the allowance allocated to each loan category does not represent the total available to absorb losses which may occur within the loan category, since the total allowance for loan losses is available for losses applicable to the entire loan portfolio.

As a result of our updated charge-off and loss analyses, we modified certain allowance coverage percentages during each quarter of 2013 to reflect our current estimates of the amount of probable inherent losses in our loan portfolio in determining our general valuation allowances. Based on our evaluation of the composition and size of our loan portfolio, the levels and composition of loan delinquencies and non-performing loans, our loss history, the housing and real estate markets and the current economic environment, we determined that an allowance for loan losses of $139.0 million was appropriate at December 31, 2013, compared to $145.5 million at December 31, 2012. The provision for loan losses totaled $19.6 million for the year ended December 31, 2013.

The balance of our allowance for loan losses represents management's best estimate of the probable inherent losses in our loan portfolio at the reporting dates. Actual results could differ from our estimates

. . .

  Add AF to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AF - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.