DBRS Ratings on Astoria Financial Corp. Unchanged after 2Q12 Results - Senior: BBB, Stable

DBRS, Inc. (DBRS) has today commented on Astoria Financial Corporation’s (Astoria or the Company) 2Q12 results. Astoria has an Issuer & Senior Debt rating of BBB. The ratings trend is Stable. The Company reported net income of $12.8 million for 2Q12, up from $10.0 million for 1Q12. The sequential improvement reflected good cost control as the Company’s expense initiatives began to take hold. This more than offset moderately lower core revenues, which remain pressured by the challenging rate environment. In addition, asset quality continued to trend better and the provision for loan losses kept pace with the prior quarter at $10.0 million.

Importantly from DBRS’s perspective, loan balances continued to grow driven by multifamily lending. Indeed, the expectation for continued earning asset growth was a key factor in DBRS confirming the Company’s ratings in May and maintaining the trend at Stable. In the quarter, multifamily loans increased $337.1 million to $2.2 billion, while one-to-four family loans declined a modest $13.3 million. Overall, average earning assets increased 1.1% from 1Q12 to $16.2 billion.

Despite the loan growth, Astoria’s earnings remain constrained due to the difficult business environment. Revenues of $102.1 million in the second quarter were down from the first quarter’s revenues (excluding securities gains) of $105.3 million. Earning asset growth and lower funding costs were not sufficient to offset lower asset yields as Astoria’s NIM declined 6 bps from 1Q12 to 2.14% and net interest income declined 1.7% from 1Q12 to $86.7 million. Second quarter fee revenues of $15.5 million declined $1.6 million from adjusted 1Q12 levels, as higher mortgage banking revenue was more than offset by lower customer service fees. As noted, on the expense front, costs were well managed. Even excluding the $3.4 million of severance charges from 1Q12 expenses, operating costs declined 8.5% q-o-q to $72.1 million. As a result, Astoria’s DBRS calculated IBPT (excluding securities gains and one-time expenses) increased $3.5 million from 1Q12 to $30.0 million.

Astoria’s asset quality remains sound in DBRS’s view. On a linked-quarter basis, Astoria’s NCOs declined 31.8% q-o-q to $11.8 million and represented 0.35% of average 2Q12 loans. NPLs, which include $45.0 million of TDRs, declined $12.3 million from 1Q12 and represented 2.50% of total loans, down from 2.66% at March 31, 2012. DBRS comments that 87% of the Company’s residential mortgage NPLs have been written down to fair value (less selling costs). As such, additional losses related to these loans should be moderate and manageable. Given this, DBRS sees Astoria’s loan loss reserve-to-NPL ratio of 43.1% as acceptable. That said, DBRS is mindful that the continued very long delay in processing foreclosures, especially in judicial review states, may result in additional losses on NPLs. Loans 30-89 days delinquent increased $600,000 from the end of 1Q12 to $163.9 million.

Astoria continued to progress in its efforts to reposition its funding mix during the quarter. Though period-end deposits were down $398.5 million from the end of 1Q12, the mix continued to improve. Specifically, while CDs declined by $661 million from March, 31, 2012, low cost savings, money market and checking account deposits increased by $262.6 million to $6.2 billion and represented 57.5% of period-end deposits. DBRS notes that this growth included $32 million of business deposit growth, evidencing success with one of the Company’s key core deposit growth initiatives. Given the mix shift, the cost of deposits declined 7 bps from 1Q12, though, as noted, this did not offset the q-o-q decline in earning asset yields. Also, in June, Astoria completed an issuance of 5% senior notes that will be used to replace its 5.75% debt that matures in October. DBRS views positively that the Company was able to replace this debt at lower cost, but acknowledges that until the maturing debt is redeemed, the added interest cost will weigh on the margin.

Astoria Federal Savings and Loan Association (Astoria Federal), Astoria’s thrift subsidiary, maintains solid capital in DBRS’s view, especially given its relatively sound asset quality and manageable loss rates. At June 30, 2012, Astoria Federal’s leverage ratio was 8.60% and Tier 1 risk based capital ratio was 14.41%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Approver: Alan G. Reid
Initial Rating Date: 23 December 2009
Most Recent Rating Update: 11 May 2012

For additional information on this rating, please refer to the linking document under Related Research.