DBRS: Astoria’s 4Q13 Earnings Increase QoQ on Higher Revenues; Lower Expenses

Summary
•Astoria reported higher 4Q13 earnings to common shareholders of $18.0 million versus $14.7 for 3Q13 on higher revenues and lower expenses.
•DBRS views Astoria’s 4Q13 results as reflecting a slowing of the runoff of its residential loan portfolio which has been a headwind for growing earnings as the Company repositions its loan portfolio.
•DBRS rates Astoria Financial Corporation’s Issuer & Senior Debt at BBB with a Stable Trend.

DBRS, Inc. (DBRS) considers Astoria Financial Corporation’s (Astoria or the Company) 4Q13 earnings as reflecting continued steady progress towards the Company’s strategic goals of growing core deposits and repositioning its loan portfolio; primarily by growing the multi-family loan book. For the quarter, the Company reported a return on average assets (ROAA) of 0.51% improved from 0.42% in 3Q13. A drop in expenses combined with an increase in revenues quarter-over-quarter (QoQ) drove the improved results. A bump in both the net interest margin (NIM) and average interest earning assets boosted net interest income moderately higher and an improvement in mortgage banking income also contributed to the increase in revenues. Although expenses were down sequentially, some of the decline this quarter is expected to be temporary as the Company ramps up advertising and promotion in subsequent quarters in conjunction with branch openings in 2014.

This quarter also marked a slowing of the runoff of its residential loan portfolio which has been a headwind for growing earnings. Higher long-term interest rates have slowed repayment activity and renewed interest in Astoria’s hybrid adjustable-rate mortgage (ARM) products which it usually keeps in portfolio.

Additionally, the Company expects to hit an inflection point in 2014 with the loan portfolio beginning to expand as the residential mortgage runoff is outpaced by growth in commercial and multifamily loans.

The Company’s asset quality remains sound in DBRS’s view. Non-performing loans (NPLs), which include trouble debt restructurings (TDRs), decreased QoQ although remaining elevated given the protracted foreclosure process in many states. DBRS notes that 86% 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 as acceptable given the manageable level of current and expected charge-offs.

Astoria’s ratings are underpinned by its conservative risk profile exemplified by sound asset quality and capital position and deeply entrenched retail banking franchise which has good market shares in the attractive Long Island, Queens and Brooklyn markets. Additionally, Astoria’s balance sheet metrics are improving. Balance sheet shrinkage has led to improving capital metrics and a reduced reliance on wholesale borrowings. However, the corresponding reduction in earning assets has also pressured earnings. DBRS rates Astoria’s Issuer & Senior Debt at BBB with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]