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AF > SEC Filings for AF > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for ASTORIA FINANCIAL CORP

Form 10-Q for ASTORIA FINANCIAL CORP


7-Aug-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 Bank. On June 1, 2014, we officially changed the name of our wholly-owned subsidiary, formerly known as Astoria Federal Savings and Loan Association, to Astoria Bank to better reflect who we are and what we do today as we have adapted and evolved to meet the needs of our expanding customer base. As the premier Long Island community bank, Astoria Bank offers a complete range of financial services and solutions designed to meet customers' personal, family and business banking needs. Our goals are to enhance shareholder value while continuing to expand our position as 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 local 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 first half of 2014, with the ten-year U.S. Treasury rate decreasing from 3.03% at the end of December 2013 to 2.53% at the end of June 2014. The national unemployment rate was 6.1% for June 2014, compared to 6.7% for 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, though increasing competition in this area has resulted in some competitor institutions offering rates and/or product terms at levels which we have chosen not to offer and which we believe do not fit our current risk tolerance.

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 Bank and Astoria Financial Corporation and revise the calculation of risk-weighted


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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.

Net income available to common shareholders for the three and six months ended June 30, 2014 increased compared to the three and six months ended June 30, 2013. For the 2014 second quarter, this increase primarily resulted from a release of reserves previously established in our allowance for loan losses that were no longer deemed necessary following the designation of a pool of loans, representing a significant portion of our non-performing residential mortgage loans, as held-for-sale, compared to a provision for loan losses charged to operations in the 2013 second quarter. In addition, the 2014 second quarter reflected a reduction in non-interest expense and lower non-interest income, as compared with the same period one year earlier. The increase in net income available to common shareholders for the 2014 six month period was largely due to a provision for loan losses credited to operations for 2014 compared to a provision for loan losses charged to operations for 2013, coupled with the impact of the NYS tax legislation signed into law on March 31, 2014 which reduced income tax expense. Contributing to the increase in net income available to common shareholders for the six months ended June 30, 2014, compared to the six months ended June 30, 2013, was an increase in net interest income and a decline in non-interest expense. Lower non-interest income and higher preferred stock dividends partially offset these increases.

As of June 30, 2014, we designated a pool of non-performing residential mortgage loans as held-for-sale, at which time we recorded a charge-off to the allowance for loan losses of $8.7 million to write down the pool from its previous recorded investment of $195.0 million to its estimated fair value of $186.3 million. In addition, as indicated above, we recorded a loan loss release of $5.7 million. The allowance for loan losses totaled $118.6 million at June 30, 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 significant reduction in non-performing loans and continued improvement in our loan loss experience, as well as the high quality of our loan originations and the contraction of the overall loan portfolio.

Net interest income for the three and six months ended June 30, 2014 increased, compared to the three and six months ended June 30, 2013, reflecting declines in interest expense which exceeded the declines in interest income. The net interest rate spread and the net interest margin each increased for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013. 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. For the three and six month periods ended June 30, 2014 the declines in interest income from the comparable 2013 periods reflected reductions in the average balances of residential mortgage loans and lower average yields on our mortgage loan portfolio, partially offset by increases in the average balances of multi-family and commercial real estate mortgage loans and interest earned on our mortgage-backed and other securities portfolio. The declines in interest expense were primarily attributable to declines in the average costs of borrowings and the average balances of certificates of deposit for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013.


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Non-interest income decreased for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013, primarily due to decreases in mortgage banking income, net, and the absence of gain on sales of securities in the 2014 periods. Non-interest expense decreased for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013. These decreases were largely attributable to the prepayment charge for the early extinguishment of our junior subordinated debentures in the 2013 second quarter and lower federal deposit insurance premium expense in 2014 compared to 2013, partially offset by increases in compensation and benefits expenses and other non-interest expenses. We believe that as we progress through the remainder of 2014 our non-interest expense will increase reflecting the expenses associated with branch openings, our rebranding efforts and our continued focus on growing business banking.

Total assets declined slightly during the six months ended June 30, 2014 as a decrease in residential mortgage loans was substantially offset by increases in our multi-family and commercial real estate mortgage loan portfolio and our securities portfolio. At June 30, 2014, our multi-family and commercial real estate mortgage loan portfolio represented 37% of our total loan portfolio, up from 33% at December 31, 2013, reflecting our continued focus on the strategic shift in our balance sheet. The decline in our residential mortgage loan portfolio reflects an excess of mortgage loan repayments over originations and purchases in the first half of 2014, as well as the designation of a significant portion of our non-performing residential mortgage loans as held-for-sale. Residential mortgage loan repayments declined significantly for the first six months of 2014, compared to the first six months of 2013, but continued to outpace our origination and purchase volume.

Total deposits declined during the six months ended June 30, 2014 as a result of a decline in certificates of deposit which more than offset an increase in core deposits. At June 30, 2014, core deposits represented 69% of total deposits, up from 67% at December 31, 2013. Total deposits included $801.3 million of business deposits at June 30, 2014, an increase of 23% since December 31, 2013, reflecting the expansion of our business banking operations, a component of the strategic shift in our balance sheet. We expect that the continued 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.

Stockholders' equity increased as of June 30, 2014 compared to December 31, 2013. The increase was primarily the result of earnings in excess of dividends on our common and preferred stock during the first six months of 2014. Also contributing to the increase during the first six months of 2014 was an unrealized gain on our available-for-sale securities portfolio, stock-based compensation recognized and capital raised through our dividend reinvestment and stock purchase plan.

We look forward to further strengthening and expanding our position as a full-service community bank as our strategy continues to gain momentum.

Designation of Loans as Non-Performing Loans Held-for-Sale

As part of our ongoing efforts to reduce the level of our non-performing residential mortgage loans, from time to time, we have given consideration to a potential bulk sale. However, in the past, market conditions typically indicated that bulk sales could result in losses in excess of those which we would anticipate via our traditional approach of working out loans individually


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through a combination of loan modifications, short sales and the foreclosure process. Therefore, we did not pursue a potential bulk sale, as continuation of our traditional approach was considered to be economically more favorable in terms of value maximization.

In the 2014 second quarter, we conducted an evaluation of our residential mortgage loans past due 90 days or more for the purpose of determining whether a greater value could be derived in a potential bulk sale, should such be sought, in excess of that which we have realized in recent periods through our traditional approach of working loans out individually. This evaluation indicated that market conditions at that time could be favorable for a potential bulk sale and, in June 2014, we sought indicative bid values on a designated pool of our non-performing residential mortgage loans from multiple potential investors, and we designated the pool as non-performing loans held-for-sale.

As of June 30, 2014, the pool of non-performing loans held-for-sale was carried at its estimated fair value of $186.3 million. This pool consisted of loans with an immediately previous aggregate recorded investment of $195.0 million. Once designated as held-for-sale in June 2014, the pool was written down to its estimated fair value based upon estimated proceeds to be received for the pool of loans in a bulk sale transaction, consistent with the expressions of interest received from potential investors. This resulted in a charge-off of $8.7 million that was taken against the allowance for loan losses in the 2014 second quarter for the excess of the recorded investment of $195.0 million over the estimated fair value of $186.3 million. Based upon our quantitative analysis, we had maintained an allowance for loan losses attributable to this pool of loans of approximately $14.4 million. Following our quarterly review of the adequacy of the allowance for loan losses, the residual $5.7 million of reserves previously attributable to this pool of loans was deemed no longer required and was credited to the provision for loan losses as a reserve release during the quarter ended June 30, 2014.

Recent Developments

We considered the indications of interest from potential investors for our pool of non-performing residential mortgage loans held-for-sale and invited the highest bidder to commence its due diligence process on the loans in early July. This due diligence process continued for several weeks during which time we worked with the potential investor to negotiate a definitive sale agreement. On July 21, 2014, we announced that we had executed a definitive agreement with the successful bidder to acquire substantially all of the non-performing residential mortgage loans held-for-sale at terms approximating their carrying value at June 30, 2014. On July 31, 2014, we completed the bulk sale transaction. We believe the sale will have several positive impacts as we move forward, including, but not limited to, a positive effect on future federal deposit insurance assessment rates, an improved loan portfolio risk profile and reduced foreclosure related expenses.

Prior to completing the bulk sale transaction on July 31, 2014, approximately $5 million of loans in the pool of loans to be sold were foreclosed upon and approximately $3 million of loans were satisfied via short sales or payoffs. There was no material financial statement impact from these resolutions. In addition, approximately $4 million of loans were excluded from the pool of loans to be sold due to various matters arising in the due diligence process. Such loans remain designated as available-for-sale during the 2014 third quarter.


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Total loans sold had a carrying value of approximately $174 million, reflecting the previous write down to the estimated fair value through June 30, 2014. We received aggregate consideration which approximated the carrying value of the loans. The loan sale agreement governing the transaction contains usual and customary indemnification provisions protecting the purchaser from breaches of our representations, warranties and covenants. The indemnification protection expires 180 days after the closing. In addition, the loan sale agreement contains customary provisions obligating us to cure certain document deficiencies with respect to the loans that the purchaser identified to us prior to the closing. We have agreed that if we are unable to cure such deficiencies within 90 days after the closing or if we receive a valid indemnification claim with respect to a loan within 180 days after the closing, we will negotiate an adjustment to the purchase price for such loans or, if we prefer, repurchase such loans. We do not believe that the indemnification and document cure provisions will have a material impact on the overall sale transaction.

Available Information

Our internet website address is www.astoriabank.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.astoriabank.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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