DBRS: Astoria’s 2Q14 Earnings Decrease QoQ on Higher Taxes; Lower PPNR

Summary
• Astoria reported lower 2Q14 earnings to common shareholders of $20.1 million versus $29.0 million for 1Q14 reflecting a more normalized income tax expense as well as a decline in pre-provision net revenue.
• 2Q14 results also include a negative loan loss provision reflecting a pending NPL sale.
• 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) 2Q14 earnings as reflecting continued ongoing progress towards the Company’s strategic goals of growing core deposits and repositioning its loan portfolio, primarily by growing the multi-family loan book. Still, pre-provision net revenue declined from the linked quarter as modest net interest margin compression and a decline in loan balances led to a drop in net interest income. Expenses were up modestly and are expected to ramp up further in subsequent quarters reflecting branch openings and corresponding advertising and promotion spend. However, the non-performing loan (NPL) sale should provide some offset as it correlates into lower FDIC insurance assessment rates and foreclosure related expenses.

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. NPLs, which include troubled debt restructurings, decreased quarter-on-quarter (QoQ) and are expected to move considerably lower following the completion of the NPL sale which is expected at month-end. The sale will reduce non-performing assets by over half. 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.

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