DBRS Ratings on Astoria Financial Corp. Unchanged after 4Q12 Results - Senior: BBB, Stable

DBRS, Inc. (DBRS) has today commented on Astoria Financial Corporation’s (Astoria or the Company) 4Q12 results. DBRS rates the Company’s Issuer & Senior Debt rating at BBB with a Stable trend. For the quarter, the Company reported net income of $16.9 million, up from $13.4 million for 3Q12, and from $11.8 million for 4Q11. Reflecting some noise, higher linked-quarter earnings were attributable to a 6.3% increase in total revenues, which more than offset a 14.7% increase in provisions for loan loss reserves and a 0.8% increase in non-interest expense.

DBRS sees Astoria’s fourth 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. Average CDs declined 6.8% QOQ, while non-CD deposit balances increased 1.8% and represented 60% of average deposits in 4Q12, up from 58% in 3Q12. Reflecting the improved mix, Astoria’s cost of deposits declined 8 bps to 75 bps from 3Q12.

DBRS notes that QoQ results reflected several non-core items. During 4Q12, the Company’s earnings were impacted by a $6.0 million gain on the sale of securities and a $2.2 million employee retirement charge. In 3Q12, earnings were impacted by a $1.2 million debt extinguishment charge.

Positively, Astoria’s core earnings were improved QoQ, despite the difficult business environment. Specifically, on an adjusted basis, excluding non-core items, Astoria’s DBRS calculated income before provisions and taxes increased 3.0% to $32.1 million, driven by a 1.6% increase in spread income and a 0.6% decline in adjusted non-interest expense, partially offset by a 5.6% decrease in adjusted non-interest income.

In the quarter, the multifamily loan and commercial real estate (CRE) loan portfolios increased by a combined $203.4 million, or 6.8% sequentially. However, one-to-four family loans declined $528.2 million, or 5.1%, reflecting elevated repayments due to the continued low interest rate environment, which has made hybrid ARM products less attractive versus 30 year fixed rate conforming loans. Overall, the multifamily/CRE book represented 24.0% of total loans, at December 31, 2012, up from 22.0% at September 30, 2012. DBRS notes that the contraction in the overall loan portfolio is of concern, because if it continues, Astoria’s earnings capacity will be further pressured. As such, DBRS expects Astoria’s earnings to remain constrained in the current environment.

Net interest income improved $1.4 million, or 1.6%, to $87.4 million from the third quarter, primarily due to reduced funding costs associated with the improved funding mix. Astoria’s NIM widened 12 bps to 2.21% QoQ, yet on an adjusted basis, excluding the cost of carrying additional debt in 3Q12, which eventually was utilized to paydown more expensive debt, NIM widened by a more moderate 3 bps sequentially. Meanwhile, fourth quarter fee revenues, excluding securities gains, decreased by $0.9 million, or 5.6%, QoQ, to $15.6 million, reflecting declines in customer service fees, mortgage banking income and bank owned life insurance.

As noted, adjusted expenses were well managed in the quarter, down $0.4 million, or 0.6%, to $71.0 million, sequentially. DBRS notes that future expenses will be challenged by Astoria’s focus on expanding its business banking platform (primarily deposit gathering) which entails the hiring of relationship managers, and an increase in future branch count (roughly 2 per year).

The Company’s asset quality remains sound in DBRS’s view. Although Astoria’s NCOs increased 52.7% to $13.9 million, linked-quarter, they represented a moderate 0.41% (annualized) of average loans for 4Q12, up from 0.27% (annualized) for 3Q12. NPLs, which include $32.8 million of TDRs, declined $7.1 million from 3Q12 to $315.1 million, and represented 2.38% of total loans at December 31, 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 46.2% 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.

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 December 31, 2012, Astoria Federal’s leverage ratio was 9.24% and its Tier 1 risk based capital ratio was 15.23%.

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

[Amended on June 25, 2014 to remove unnecessary disclosures.]