DBRS Ratings on Astoria Financial Corp. Unchanged after 3Q12 Results - Senior: BBB, Stable

DBRS, Inc. (DBRS) has today commented on Astoria Financial Corporation’s (Astoria or the Company) 3Q12 results. Astoria has an Issuer & Senior Debt rating of BBB. The ratings trend is Stable. For the quarter, the Company reported net income of $13.4 million for 3Q12, up from $12.8 million for 2Q12. The sequential improvement came despite revenue and expense pressures associated with repaying the Company’s 5.75% senior notes. After issuing senior notes in June 2012, the Company redeemed its maturing 5.75% senior notes in September. The cost of carrying both notes for much of the third quarter added $2.5 million to interest expense and noninterest expenses included $1.2 million of early extinguishment charges.

Aside from these one-time items, DBRS sees Astoria’s third quarter results as evidencing further progress with the Company’s initiatives to grow core deposits and reposition its loan portfolio, while keeping costs under control. Excluding the noted debt extinguishment charge, expenses declined about 1% from 2Q12 to $71.4 million, below the targeted quarterly run rate of between $72 million and $75 million. Average non-CD deposit balances increased 3% QoQ and represented 58% of average 3Q12 deposits. Reflecting the improving mix, Astoria’s cost of deposits declined 16 bps from 2Q12 to 83 bps.

In the quarter, the multifamily loan and commercial real estate portfolios increased a combined $132.9 million. However, one-to-four family loans declined $292.7 million reflecting elevated repayments due to further declines in 30 year mortgage rates. DBRS notes that the contraction in the overall loan portfolio is of concern, because if it continues, Astoria’s earnings capacity will be further diminished. As such, DBRS expects Astoria’s earnings to remain constrained in the current environment.

Excluding the extra interest expense associated with carrying both senior notes, total 3Q12 revenues of $105.1 increased about $3 million QoQ. Net interest income improved from the second quarter primarily due to reduced funding costs associated with the improved funding mix noted above. Astoria’s net interest margin (adjusted for the cost of carry) was around 2.18% for 3Q12, up from 2.14% in the second quarter. Third quarter fee revenues of $16.6 million increased 7.3% QoQ, driven by higher net mortgage banking income and customer service fees. As noted, costs were well managed in the quarter and, as a result, Astoria’s DBRS-calculated IBPT, operating income before provisions and taxes, (excluding one-time expenses) increased $3.6 million from 2Q12 to $33.6 million.

Astoria’s asset quality remains sound in DBRS’s view. On a linked-quarter basis, Astoria’s NCOs declined 22.6% to $9.1 million and represented 0.27% (annualized) of average 3Q12 loans. NPLs, which include $28.6 million of TDRs, declined $21.1 million from 2Q12 to $322.2 million and represented 2.38% of total loans, down from 2.50% at June 30, 2012. DBRS notes that 83% of the Company’s residential mortgage NPLs have been written down to fair value (less selling costs). As a result, DBRS sees Astoria’s loan loss reserve-to-NPL ratio of 46.1% 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. The Company’s generally positive credit trends, along with the modest decline in total loans, supported a loan loss provision of $9.5 million in the third quarter, down from $10.0 million in 2Q12.

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 September 30, 2012, Astoria Federal’s leverage ratio was 8.86% and its Tier 1 risk based capital ratio was 14.64%.

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: Roger Lister
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.