DBRS Comments on Astoria Financial Corp’s 3Q11 Results - Senior at BBB, Stable Trend

DBRS Inc. (DBRS) has commented today that its ratings for Astoria Financial Corporation (Astoria or the Company), including its BBB Issuer & Senior Debt rating, are unchanged following the release of 3Q11 results. The Company reported 3Q11 earnings of $11.2 million, down from $16.8 million for 2Q11. Earnings in 3Q11 were pressured by continued, albeit slowing loan contraction, a narrower net interest margin (NIM) and an increase in non-cash ESOP expense of over $3 million. Specifically, the q-o-q decrease in 3Q11 net income was driven by a 4.9% decline in total revenues and a 3.5% increase in non-interest expense. Provisions for loan loss reserves kept pace with the prior quarter.

Lower 3Q11 revenue was attributable to the pressures of the difficult environment with a 5.3% decline in net interest income and a 2.9% decrease in non-interest income. Lower linked-quarter net interest income reflected a 7 basis point narrowing of NIM to 2.27% and a 2.3% contraction in average earning assets. The narrower NIM reflected decreasing earning asset yields outpacing declining liability costs. In part, the narrower NIM also reflected one more day of interest expense in the quarter. The decline in assets was attributable to both lower levels of loans and securities. Loan contraction continues to be driven by the fragile housing market and elevated prepayment levels. Nonetheless, DBRS notes that the q-o-q pace of loan contraction slowed during 3Q11. Finally, the decline in non-interest income was mostly attributable to lower customer service fees, partially offset by higher BOLI.

On a linked-quarter basis, higher non-interest expense was driven by a $3.0 million plus increase in ESOP expense, higher occupancy and advertising expense. DBRS comments that the Company continues to reach out to the FDIC to reduce its deposit insurance premiums, but will not have resolution over the near term.

Despite significant macroeconomic headwinds, Astoria’s asset quality remains sound. On a linked-quarter basis, net charge-offs (NCOs) contracted by $2.4 million to $14.4 million and represented a low 0.43% of average loans for 3Q11, down from 0.49% for 2Q11. Meanwhile, nonperforming loans (NPLs) modestly expanded by $3.6 million to $379.9 million and represented an acceptable 2.85% of total loans at September 30, 2011, up slightly from 2.79% at June 30, 2011. DBRS notes that the overwhelming majority of the Company’s NCOs were 1-4 family residential mortgages. DBRS notes that 80% of the Company’s residential mortgage NPLs have been written down to fair value (less selling costs). As such, additional losses related to these loans should be moderate and manageable. Positively, early stage delinquencies (30-89 days past due) were down for the fifth consecutive quarter and likely point to improving credit quality over the near-term.

Although Astoria’s loan loss reserve to NPL ratio is relatively modest at 46.9%, reserves are acceptable given the Company’s current charge-off rate. Specifically, Astoria’s allowance for loan losses represented approximately 3.1 years (12.4 quarters) of 3Q11 NCOs.

Astoria’s liquidity position remains sound. Typical for most thrifts, the Company has a sizable level of wholesale funds. Specifically, Astoria’s DBRS-calculated wholesale funding reliance is a relatively high 38% as compared to the median 20% for similarly rated peers (as of June 30, 2011). The risk for Astoria is that a high dependence on generally costlier, less stable wholesale borrowings could significantly raise its funding costs, compress margins and constrain profitability. DBRS notes that the Company also utilizes wholesale funds for interest rate risk management purposes.

By the end of 3Q11, Astoria had expanded its deposits by approximately 0.5% and, more importantly improved the deposit mix, as certificates of deposits were reduced by 4.7%. The Company’s securities portfolio, which represents 15% of total assets, as well as access to the Federal Home Loan Bank and Federal Reserve, round out its liquidity profile. DBRS notes that Astoria’s securities portfolio is overwhelmingly good quality, low risk REMICs and CMOs, and to a far lesser extent, somewhat riskier, albeit AAA-rated, private label MBS.

Astoria Federal Savings & Loan Association (Astoria Federal), Astoria’s thrift subsidiary, maintains solid capital, especially given its relatively sound asset quality and manageable loss rates. At September 30, 2011, Astoria Federal’s leverage ratio was 8.75% and Tier 1 risk based capital ratio was 14.89%.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Mark Nolan
Approver: Roger Lister
Initial Rating Date: 23 December 2009
Most Recent Rating Update: 8 March 2011

For additional information on this rating, please refer to the linking document under Related Research.