Astoria Financial Corporation (AF)

Q3 2010 Earnings Conference Call

October 21, 2010 10 AM ET


George Engelke, Jr. – Chairman & CEO

Frank Fusco – EVP, Treasurer & CFO

Monte Redman – President and COO


Matthew Clark – KBW

Mark Fitzgibbons – Sandler O’Neill

Tom Alonso – Macquarie

Christopher Nolan – CRT Capital

Collyn Gilbert – Stifel Nicolaus

Rick Weiss – Janney Montgomery Scott

Matthew Kelley – Sterne, Agee & Leach

Bruce Harting – Barclays Capital

David Hochstim – Buckingham Research Group

David Darst – Guggenheim Partners

Edwin Groshans – Height



Good day and welcome to Astoria Financial Corporation’s Third Quarter 2010 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation.

(Operator Instructions)

Today’s call is being recorded.

Today’s conference call includes several forward-looking statements, which are intended to be covered under the Safe Harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are within the meaning of Section 27-A of the Securities Act of 1933 as amended, and Section 21-E of the Securities Exchange Act of 1934 as amended.

A discussion of the risk factors associated with the use of forward-looking statements is outlined on pages six of our third quarter 2010 earnings release, which is available on our website or may be obtained from the company upon request.

It is now my pleasure to turn the conference over to Mr. George L. Engelke, Jr. Chairman and Chief Executive Officer of Astoria. Sir, you may begin.

George Engelke, Jr.

Thank you and good morning. Welcome to our review of Astoria Financial Corporation’s 2010 third quarter results. Joining me this morning are Monte Redman, President and Chief Operating Officer; Frank Fusco, CFO and Peter Cunningham, our Investor Relations Officer. Following my brief remarks we will entertain any questions you may have.

Last evening we reported third quarter earnings of $25.5 million or $0.23 per share. Earnings for the nine months of this year totaled $49.9 million or $0.53 per share. This represents per share increases of 156% and 152% respectively. The improvement was due primarily to lower credit costs. For the third quarter, we reported a $20 million provision for loan losses, $15 million lower than the previous quarter and $30 million lower than last year’s third quarter.

With respect to credit quality, non-performing loans decreased $15.5 million from the previous quarter to just under $400 million, and overall loan delinquencies decreased $72 million or 10% from the previous quarter. It’s important to note that the loss potential remaining in the non-performing loan portfolio has been greatly reduced. We have already reviewed markdown and charged off as necessary over $247 million or 72% of current residential non-performing loans to their adjusted fair value less selling costs.

We also reported a net interest margin of 2.32% for the third quarter, 5 basis points lower than the linked quarter and 25 basis points higher than the 2009 third quarter. The linked quarter decrease was primarily due to the effective one extra day of interest expense in the third quarter. The year-over-year increase was due to the cost of interest bearing liabilities declining more rapidly than the yield on interest on earning assets.

During the third quarter, the balance sheet contracted $733 million from the previous quarter as loan prepayments continued to outpace loans productions. The combination of historically low rates for conforming 30-year fixed rate mortgages and high conforming rate state limits has had a negative impact on the jumbo hybrid arm portfolio lenders, such as Astoria and has contributed to the decrease in our loan portfolio and balance sheet. With respect to liabilities, deposits decreased a $141 million from the previous quarter and 705 year to year – year-to-date primarily in CD headcounts as we continued to let high cost CDs run off. Low cost pass book, money market and checking accounts on the other hand increased $231 million year-to-date or 8% annualized. Borrowings declined $600 million from the previous quarter and $665 million from the December 31, 2009 to $5.2 billion.

With respect to the recent headlines alleging problems with foreclosure processing at several of the larger mortgage servicers, we have conducted a review of our forward closure process and have not found it necessary to interrupt and foreclosures. This notwithstanding the problems concerning faulty foreclosures could cause a further delay in the processes already in some states, a two-to-three year process and will only add to the cost of foreclosing.

Finally, although we remain cautiously optimistic with respect to the outlook for credit quality and expect credit costs will continue to decline over the next several quarters resulting in improved financial performance, i.e., operating environment for residential mortgage portfolio lenders nevertheless remains challenging. The government continues to subsidize the residential mortgage market more – mortgage market with programs designed to keep the 30-year fixed rate conforming loan below normal market rate levels. In addition, Congress recently extended the expanding conforming loans limits in many markets we operate in through September 2011. Therefore, we anticipate that elevated levels of mortgage prepayment activity will continue to outpace our loan production.

This will will likely result in the loan portfolio and balance sheet declining somewhat further. We anticipate maintaining a relatively stable net interest margin, which when coupled with lower credit costs should mitigate the earnings impact from a smaller balance sheet. In the meantime, we will continue to strengthen the balance sheet by continuing to originate quality residential mortgage loans for portfolio. We expect capital levels will continue to increase as earnings continue to improve, which should position us to take advantage of further balance sheet growth opportunities when they arise.

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