DBRS Ratings on Astoria Financial Corp. Unchanged after 2Q13 Results - Senior: BBB, Stable

DBRS, Inc. (DBRS) has today commented on Astoria Financial Corporation’s (Astoria or the Company) 2Q13 results. On June 21, 2013, DBRS confirmed the ratings of the Company’s Issuer & Senior Debt rating at BBB with a Stable trend. DBRS sees Astoria’s second quarter results as evidencing management’s continued progress executing on the Company’s strategic goals of growing core deposits and repositioning its loan portfolio; primarily by growing the multi-family loan book, while keeping costs under control.

For the quarter, the Company reported net income available to common shareholders of $12.8 million, down from $13.9 million for 1Q13, and unchanged from $12.8 million reported for 2Q12. As expected, a $4.3 million ($2.8 million after-tax) prepayment charge in connection with the redemption of $125 million of capital securities drove the linked quarter decline in net income. This charge was offset by a $2.0 million gain on sale of securities and a $4.6 million reduction in provision for loan losses as compared to the linked quarter. Additionally, the payment of the preferred stock dividend reduced net income available to common shareholders by $2.8 million.

Astoria’s core earnings also decreased QoQ. Specifically, the Company’s DBRS-calculated adjusted income before provisions and taxes (IBPT) decreased 5.9% to $31.3 million from $33.3 million. The decline was driven by a 1.6% increase in adjusted non-interest expense and a 9.6% decrease in adjusted non-interest income, partially offset by 3.4% increase in spread income.

For 2Q13, net interest income increased $0.9 million to $84.9 million as compared to the linked quarter. A slight increase in the net interest margin (NIM) and a relatively stable level of average interest earning assets drove the increase. Despite the difficult interest rate environment, Astoria’s NIM has been relatively stable and for 2Q13 increased by three basis points (bps) to 2.22% QoQ. During the quarter, the Company restructured $1.2 billion in borrowed funds decreasing their average cost by approximately 90 bps. Astoria expects the NIM for 2013 to be slightly higher than the previous year. Meanwhile, first quarter fee revenues, excluding securities gains, decreased by $1.8 million, or 9.6%, QoQ, to $16.5 million, largely reflecting a decrease in mortgage banking income. This line item was elevated in the previous quarter as Superstorm Sandy delayed some loan closings from 4Q12 and pushed them into 1Q13.

For 2Q13, DBRS-calculated adjusted expenses were up $1.1 million, or 1.6%, to $70.1 million, sequentially. The increase reflects higher compensation and benefit expenses as well as an increase in advertising expenses partially offset by lower FDIC premiums and a decrease in occupancy, equipment and systems expense. Despite the modest increase, DBRS views the Company’s expenses as well contained reflecting previous cost control initiatives. DBRS notes that future expenses may 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) including the Company’s move into the Manhattan market.

In the quarter, the multifamily loan and commercial real estate (CRE) loan portfolios increased by a combined $337.3 million, or 10% sequentially. However, one-to-four family loans declined $561.3 million reflecting continued elevated refinance activity, which has made Astoria’s loans that it typically keeps in portfolio, including hybrid ARM products, less attractive versus long-dated fixed rate conforming loans. Overall, the multifamily/CRE book represents 29.3% of total loans, at June 30, 2013, up from 26.0% at March 31, 2013. DBRS notes that the contraction in the overall loan portfolio, which has pressured earnings, remains a concern although the pace of contraction has slowed significantly. Additionally, higher long-term interest rates should slow repayment activity as well as renew interest in Astoria’s hybrid ARM products.

Overall, total deposits declined by 1.9%, sequentially, as CDs decreased by 4.8% QoQ, while non-CD deposit balances were relatively flat. Positively, non-CD deposit balances represented 65% of total deposits in 2Q13, up from 64% in 1Q13 and 58% in 2Q12. As a result of the improved deposit mix, Astoria’s cost of interest bearing deposits declined 30 bps to 61 bps from 2Q12.

The Company’s asset quality remains sound in DBRS’s view. Astoria’s Net-Charge Off’s (NCOs) decreased 53% to $4.9 million, linked-quarter, and represented a very low 0.15% (annualized) of average loans for 2Q13, down from 0.32% (annualized) for 1Q13. Non-Performing Loans (NPLs), which include TDRs, decreased $9.6 million from 1Q13 to $356.9 million, and represented 2.82% of total loans at June 30, 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 40.3% as acceptable. That said, DBRS is mindful that the prolonged delay in processing foreclosures, especially in judicial review states, may result in additional losses on NPLs.

The Company’s period-end tangible common equity to tangible assets ratio was adequate at 7.09% especially given its relatively sound asset quality and manageable loss rates. Tangible capital levels have been building through both balance sheet shrinkage and earnings retention. Additionally, Astoria Federal Savings and Loan Association (Astoria Federal), Astoria’s thrift subsidiary, maintains solid regulatory capital ratios. At June 30, 2013, Astoria Federal’s Tier 1 leverage, Tier 1 risk based-capital and Total risk-based ratios were 9.53%, 15.56%, and 16.83%, respectively. All bank level ratios were up as compared to the linked quarter.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]