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AF > SEC Filings for AF > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for ASTORIA FINANCIAL CORP

Form 10-Q for ASTORIA FINANCIAL CORP


8-May-2014

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 full service community bank. We focus on growing our core businesses of mortgage portfolio lending and deposit gathering 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 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 86 locations, including a full service branch in Manhattan which opened on March 31, 2014, 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 historical lows and we expect them to remain low for the near term. Long-term interest rates moved higher during the latter half of 2013 but declined somewhat in the 2014 first quarter, with the ten-year U.S. Treasury rate decreasing from 3.03% at December 31, 2013 to 2.72% at the end of March 2014. The national unemployment rate for March 2014 was 6.7%, unchanged from December 2013, and new job growth in 2014 has continued its slow pace. 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," in our 2013 Annual Report on Form 10-K, certain aspects of the Reform Act continue to have a significant impact on us. Final capital rules approved by the federal bank regulatory agencies in 2013 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 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, 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 months ended March 31, 2014 increased compared to the three months ended March 31, 2013, largely due to the impact in the 2014 first quarter of the NYS tax legislation which was signed into law on March 31, 2014. The result of this legislative change was an increase in our net deferred tax asset with a corresponding reduction in income tax expense of $11.5 million, resulting in an overall income tax benefit for the 2014 first quarter compared to income tax expense for the 2013 first quarter.

Net income available to common shareholders excluding the impact of the change in tax legislation increased for the 2014 first quarter, compared to the 2013 first quarter. This increase reflected a reduction in the provision for loan losses, an increase in net interest income and a decline in non-interest expense, partially offset by lower non-interest income and dividends on preferred stock, for the three months ended March 31, 2014, compared to the three months ended March 31, 2013.

For the 2014 first quarter, a decline in interest income was more than offset by a decline in interest expense, resulting in an increase in net interest income compared to the 2013 first quarter. The net interest rate spread and the net interest margin each increased for the 2014 first quarter compared to the 2013 first quarter. The continued low interest rate environment, coupled with the restructuring 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. The decline in interest income reflected a reduction in the average balance of residential mortgage loans and a lower average yield on our mortgage loan portfolio, partially offset by increases in the average balance of multi-family and commercial real estate mortgage loans and interest earned on our mortgage-backed and other securities portfolio. The decline in interest expense was primarily attributable to declines in the average cost of borrowings and the average balance of certificates of deposit.

The provision for loan losses for the 2014 first quarter totaled $1.6 million, compared to $9.1 million for the 2013 first quarter. The allowance for loan losses totaled $134.0 million at March 31, 2014, compared to $139.0 million at December 31, 2013. We continue to maintain our allowance for loan losses at a level which we believe is appropriate given the continued improvement in the levels of net loan charge-offs and delinquent loans as well as the high quality of our loan originations and the contraction of the overall loan portfolio. While the level of loans past due 90 days or more has continued its downward trend in the 2014 first quarter, we expect the levels will remain somewhat elevated for some time, especially in certain states where judicial foreclosure proceedings are required.

Non-interest income decreased for the three months ended March 31, 2014 compared to the three months ended March 31, 2013, primarily due to a decrease in mortgage banking income, net. Non-interest expense decreased for the three months ended March 31, 2014 compared to the three months ended March 31, 2013, reflecting declines in federal deposit insurance premium and occupancy, equipment and systems expenses, partially offset by an increase in compensation and benefits expense. The decline in occupancy, equipment and systems expense was largely due to a one-time charge in the 2013 first quarter to conform to a straight-line basis the rental expense on operating leases for certain branch locations. The increase in compensation and benefits expense was due in part to a reduction in such expenses in the 2013 first quarter to reflect changes in certain compensation policies which became effective January 1, 2013. We believe that as we progress through the remainder of 2014 our non-interest expense will increase reflecting the expenses associated with the branch we recently opened as well as the two


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additional branches we are planning to open in the second half of the year. In addition, we expect to incur increases in advertising, compensation and benefits and occupancy, equipment and systems expenses in conjunction with both the branch openings and our continued focus on business banking.

Total assets declined during the three months ended March 31, 2014, 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, 2014, our multi-family and commercial real estate mortgage loan portfolio represented 34% of our total loan portfolio, up from 33% at December 31, 2013, reflecting our continued focus on the strategic shift in our balance sheet. Residential mortgage loan repayments declined for the 2014 first quarter, compared to the 2013 first quarter, but continued to outpace our origination and purchase volume during the three months ended March 31, 2014, resulting in a decline in the portfolio.

Total deposits declined during the three months ended March 31, 2014 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 checking accounts which more than offset a decline in savings accounts. At March 31, 2014, core deposits represented 68% of total deposits, up from 67% at December 31, 2013. Total deposits included $690.1 million of business deposits at March 31, 2014, an increase of 6% since December 31, 2013, reflecting the expansion of our business banking operations, a component of the strategic shift in our balance sheet.

Stockholders' equity increased as of March 31, 2014 compared to December 31, 2013. The increase was primarily the result of undistributed net income for the 2014 first quarter. Also contributing to the increase was an unrealized gain on our available-for-sale securities portfolio, capital raised through our dividend reinvestment and stock purchase plan and stock-based compensation recognized during the 2014 first quarter.

Our strategy to strengthen and expand our position as a full service community bank continues to move forward. We believe that the branch we recently opened in Manhattan, along with the two additional branches we expect to open in the second half of the year, combined with an enriched advertising, marketing and branding campaign, will assist our business bankers as they continue to grow their business. The growth of our business banking operations should allow us to continue to grow our low cost core deposits and move closer to our goal that they represent 80% of total deposits by the end of 2015. In a very competitive environment for multi-family and commercial real estate lending, our pipeline for such loans grew by more than $135 million at March 31, 2014 compared to December 31, 2013. We believe that the remainder of the year will provide us with increased loan originations leading to net growth in that portfolio similar to what we have achieved over the past two years. We expect this growth to outpace the shrinkage in the residential mortgage loan portfolio, allowing us to begin to achieve net growth in the total loan portfolio and, in turn, interest-earning assets.

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


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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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