DBRS’ Ratings on Astoria Financial Corp. Unchanged after 3Q13 Results - Senior: BBB, Stable

DBRS, Inc. (DBRS) has today commented on Astoria Financial Corporation’s (Astoria or the Company) 3Q13 results. DBRS rates the Company’s Issuer & Senior debt at BBB with a Stable trend DBRS sees Astoria’s third quarter results as evidencing continued progress towards 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 $14.7 million, up from both $12.8 million reported for 2Q13 and $13.3 million reported for 3Q12. A $2.0 million reduction in the provision for loan losses, as compared to the linked quarter, helped to boost earnings this quarter. Additionally, the linked quarter’s earnings were impacted by some one-time items, which lowered earnings including a $4.3 million ($2.8 million after-tax) prepayment charge in connection with the redemption of capital securities partially offset by a $2.0 million gain on sale of securities. Excluding these one-time items, Astoria’s core earnings decreased QoQ. Specifically, the Company’s DBRS-calculated adjusted income before provisions and taxes (IBPT) decreased 7.4% to $29.0 million from $31.3 million. The decline was driven by a 3.4% increase in adjusted non-interest expense and a 7.4% decrease in adjusted non-interest income, partially offset by 1.5% increase in spread income.

Net interest income increased $1.3 million to $86.2 million sequentially reflecting net interest margin (NIM) expansion and a relatively stable level of average interest earning assets. Despite the difficult interest rate environment, Astoria’s NIM increased by six basis points to 2.28% QoQ, as the Company restructured $200 million in borrowed funds decreasing their average cost by approximately 115 bps. Meanwhile, third quarter fee revenues, excluding securities gains, decreased by $1.2 million, or 7.4%, QoQ, to $15.3 million, largely reflecting a $1.4 million decrease in mortgage banking income reflecting the slowdown in refinancing activity.

DBRS-calculated adjusted expenses were up $2.4 million, or 3.4%, to $72.5 million, sequentially. The increase largely reflects higher other expenses, and to a lesser extent, higher compensation and benefit expenses, occupancy, equipment and systems expenses, and FDIC premiums - offset partially by lower advertising expenses. Despite the quarterly 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 including the Company’s move into the Manhattan market.

The multifamily loan and commercial real estate (CRE) loan portfolios increased by a combined $213.3 million, or 6% sequentially. However, one-to-four family loans declined $311.0 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 almost one-third of total loans, at September 30, 2013, up from 29.3% at June 30, 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. Indeed, the loan portfolio may have reached an inflection point in September with the company experiencing approximately $8.0 million of loan growth during the month. Higher long-term interest rates have slowed repayment activity and renewed interest in Astoria’s hybrid ARM products which it usually keeps in portfolio.

Overall, total deposits declined by 1.8%, sequentially, as CDs decreased by 3.8% QoQ, while non-CD deposit balances were down modestly. Positively, non-CD deposit balances represented 66% of total deposits in 3Q13, up from 65% in 2Q13 and 59% in 3Q12. As a result of the improved deposit mix, Astoria’s cost of interest bearing deposits declined 18 bps to 59 bps from 3Q12.

The Company’s asset quality remains sound in DBRS’s view. Astoria’s net charge-offs decreased 31% to $3.4 million, linked-quarter, and represented a very low 0.11% (annualized) of average loans for 3Q13, down from 0.15% (annualized) for 2Q13. Non-performing loans (NPLs), which include TDRs, decreased $5.6 million from 2Q13 to $351.3 million, and represented 2.80% of total loans at September 30, 2013. DBRS notes that 87% 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 40.7% as acceptable.

Astoria’s period-end tangible common equity to tangible assets ratio was adequate at 7.22%, especially given the Company’s 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 with all Bank level ratios improving sequentially.

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

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