DBRS: Astoria’s 1Q14 Earnings Increase QoQ Following Change in NY State Tax Legislation

Summary
• Astoria reported higher 1Q14 earnings to common shareholders of $29.4 million versus $18.0 million for 4Q13 reflecting an income tax benefit recorded this quarter, which drove a $13.3 million QoQ decrease in income tax expense.
• 1Q14 results also reflect a lower loan loss provision as asset quality continues to improve.
• 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) 1Q14 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. The impact for Astoria of the change in the NY State calculation of income tax expense was an $11.5 million increase in net deferred tax asset with a corresponding reduction in income tax expense. Outside of this tax item, net interest income was relatively flat and noninterest income was down reflecting the linked quarter’s change in the mortgage servicing rights valuation allowance. Expenses were up modestly. A bump in the net interest margin, which includes the impact of a large prepayment penalty on a group of loans, boosted net interest income moderately higher, despite a decline in average earning assets. Although expenses were relatively flat sequentially, expenses are expected to ramp up in subsequent quarters reflecting branch openings and corresponding advertising and promotion spend.

This quarter also marked a continuance of the runoff in the Company’s residential loan portfolio which has been a headwind for growing earnings. Astoria 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 troubled debt restructurings, decreased quarter-on-quarter (QoQ) although remain 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.]