DBRS Ratings on Astoria Financial Corp. Unchanged after 1Q13 Results - Senior: BBB, Stable

DBRS, Inc. (DBRS) has today commented on Astoria Financial Corporation’s (Astoria or the Company) 1Q13 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 $13.9 million, down from $16.9 million for 4Q12, but up from $10.0 million for 1Q12. Lower linked-quarter earnings were primarily attributable to a $6.0 million gain on the sale of securities in the prior quarter.

DBRS sees Astoria’s first quarter results as evidencing further progress with the Company’s strategic goals to grow core deposits and reposition its loan portfolio, while keeping costs under control.

Astoria’s core earnings increased QoQ, despite the difficult business and interest rate environment, especially for spread lenders like Astoria. Specifically, on an adjusted basis, which excludes non-core items, Astoria’s DBRS calculated income before provisions and taxes increased 13.4% to $36.4 million, driven by a 7.1% decrease in adjusted non-interest expense and a 16.8% increase in adjusted non-interest income, partially offset by 3.9% decrease in spread income.

In the quarter, the multifamily loan and commercial real estate (CRE) loan portfolios increased by a combined $210.8 million, or 7% sequentially. However, one-to-four family loans declined $513.9 million 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 represents 26.0% of total loans, at March 31, 2013, up from 24.0% at December 31, 2012. DBRS notes that the contraction in the overall loan portfolio, which has pressured earnings, remains a concern.

Overall, average deposits declined by 0.5%, sequentially, as CDs decreased by 6.7% QoQ, while non-CD deposit balances increased 3.4%. Positively, non-CD deposit balances represented 63% of total deposits in 1Q13, up from 60% in 4Q12. As a result of the improved mix, Astoria’s cost of interest bearing deposits declined 8 bps to 67 bps from 4Q12.

Net interest income decreased $3.4 million, or 3.9%, to $84.0 million from the fourth quarter, primarily due to balance sheet shrinkage. Despite the difficult interest rate environment, Astoria’s NIM narrowed by just two bps to 2.19% QoQ. The Company expects the NIM for 2013 to be slightly higher than the previous year. Meanwhile, first quarter fee revenues, excluding securities gains, increased by $2.6 million, or 16.8%, QoQ, to $18.3 million, reflecting increases in mortgage banking income, as Superstorm Sandy delayed some loan closings in 4Q12 and pushed them into 1Q13.

As noted, adjusted expenses were well managed in the quarter, down $5.0 million, or 7.1%, to $66.0 million, sequentially. The decrease reflects previous cost control initiatives as well as lower FDIC insurance premium expense. 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. Astoria’s NCOs decreased 25% to $10.4 million, linked-quarter, and represented a manageable 0.32% (annualized) of average loans for 1Q13, down from 0.41% (annualized) for 4Q12. Starting this quarter and regardless of the delinquency status of the loan, the Company is including bankruptcy loans discharged prior to 2012 in NPLs. As a result, NPLs, which include TDRs, increased $51.4 million from 4Q12 to $366.5 million, and represented 2.84% of total loans at March 31, 2013. DBRS notes that 88% 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 39.4% 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, especially given its relatively sound asset quality and manageable loss rates. At March 31, 2013, Astoria Federal’s leverage ratio was 9.42% and its Tier 1 risk based capital ratio was 15.48%.

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

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