DBRS Confirms Astoria Financial Corporation; Senior at BBB, Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of Astoria Financial Corporation (Astoria or the Company) along with its thrift subsidiary, Astoria Federal Savings & Loan Association (Astoria Federal or the thrift), including its Issuer & Senior Debt rating of BBB. At the same time, DBRS has assigned a rating of B (high) to the Company’s Preferred Stock. The trend for all ratings remains Stable. The rating confirmation follows a detailed review by DBRS of the Company’s operating performance, financial fundamentals and future prospects.

The Company’s ratings are underpinned by Astoria’s conservative risk profile exemplified by sound asset quality and a solid capital position, which provides adequate loss absorption capacity. It also considers the thrift’s deeply entrenched retail banking franchise which has good market shares in the attractive Long Island, Queens and Brooklyn markets, and growing multi-family loan portfolio. The confirmation also acknowledges the Company’s modest, although resilient through the cycle, earnings. Through the downturn, Astoria reported only one quarterly loss, which was due to a write-down on Freddie Mac preferred stock.

The Stable trend reflects DBRS’s belief that 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. A relatively stable Net Interest Margin (NIM) coupled with expense control initiatives are expected to contribute to improving earnings going forward. DBRS sees the potential for negative ratings pressure should Astoria be unable to deliver higher core earnings.

Astoria’s spread-driven relatively thin margin business model and additional pressure from a reduction in earning assets has led to a decline in earnings. In 2012, the Company reported earnings of $53.1 million, down from $67.2 million in 2011 and far below its peak of $233.8 million in 2005, albeit on a much larger balance sheet. Positively, through 1Q13, Astoria has reported four consecutive quarters of increasing quarterly DBRS-calculated income before provisions and taxes (IBPT; excluding securities gains and one-time expenses). Core noninterest expenses have declined over the last three quarters reflecting high levels of residential mortgage loan repayments in the current low-rate environment, average earning assets fell for the fourth consecutive year. After declining 7.9% in 2010 and 11.6% in 2011, average earning assets fell 1.3% in 2012. Positively, while continuing to decline over the last two quarters the pace of decline has moderated.

Future earning asset growth is expected to be driven by multifamily lending and DBRS views the success that Astoria has had upon re-entering the multifamily lending space in 2011 as a key consideration in the ratings confirmation. DBRS views positively the diversification this brings to the portfolio as well as the credit profile of the Company’s multifamily production. Although it will lead to a less granular portfolio overall, Astoria is focused on the rent controlled/rent stabilized market in New York City which historically has performed well. Approximately 90% of closed multifamily loans and loans in the pipeline are subject to rent control or rent stabilization which supports the view that these loans will fit with the Company’s conservative risk appetite. DBRS notes that multi-family lending in New York has become a crowded lending space with a number of industry-focused and recent entrants competing for these types of loans. Positively, multifamily loans are being added at more attractive margins than other loans or securities, helping to stabilize the Company’s NIM around 2.20%.

Although Astoria’s asset quality remains elevated relative to its historically very low levels, credit costs remain moderate and highly manageable. Moreover, the Company’s credit metrics compare favorably to those of similarly rated peers. Reflecting lower delinquencies and Non Performing Assets (NPAs), Astoria’s 2012 loan loss provision was $40.4 million, up moderately from $37.0 million in 2011 and $11.7 million less than 2012 Net Charge-offs (NCOs). In 1Q13, NCOs were $10.4 million and the loan loss provision was $9.1 million. At March 31, 2013, Astoria’s NPAs were 3.80%, up 46 bps and 25 bps from YE2012 and YE2011, respectively. The overwhelming majority of the Company’s Non Performing Loans (NPLs) are 1-4 family residential mortgages and DBRS notes that approximately 88% of the Company’s residential mortgage NPLs have been written down to fair value (less selling costs). As such, future losses related to these loans should be manageable although the protracted foreclosure process in many states is making these loans slow to move off the balance sheet. Reflecting this, over the intermediate term, DBRS expects moderate improvement in the Company’s credit quality.

Astoria’s funding and liquidity profile remains acceptable, in DBRS’s view. The Company maintains a relatively high wholesale funding reliance of 37% (DBRS calculated) at March 31, 2013, which is typical for many thrift institutions. During 2012, average deposits contracted by 4.9%, but continued to reflect an improving mix. Specifically, reflecting the Company’s efforts to grow business banking deposits as well as other initiatives, low-cost money market, savings and checking account deposits increased 13% from December 31, 2011 to $6.5 billion, while time deposits declined 28% to $4.0 billion. Astoria’s high quality securities portfolio, which represents around 14% of total assets, along with the Company’s access to the Federal Home Loan Bank and Federal Reserve, round out its liquidity profile.

With its manageable loan loss rates, DBRS sees Astoria’s capital position as providing solid loss absorption capacity. As of March 31, 2013, the Company’s tangible common equity to tangible asset ratio was 7.00% an increase of 67 basis points from YE2011, due to balance sheet shrinkage and earnings retention. Additionally, Astoria Federal’s regulatory capital ratios are comfortably above “well capitalized” levels. DBRS is mindful that double leverage at the parent is relatively high.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other applicable methodologies used include the DBRS Criteria: Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Preferred Shares & Equivalent Hybrids: These can be found at: http://www.dbrs.com/about/methodologies

[Amended on June 17, 2014, to reflect actual methodologies used]

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.

This rating is endorsed by DBRS Ratings Limited for use in the European.

Lead Analyst: Mark Nolan
Rating Committee Chair: William Schwartz
Initial Rating Date: 23 December 2009
Most Recent Rating Update: 11 May 2012

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