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 subsidiary, Astoria Bank, including the Company’s Issuer & Senior Debt rating of BBB. 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 and growing capital position. The ratings are also supported by the Company’s deeply entrenched retail banking franchise, which has good market shares in the attractive Long Island, Queens and Brooklyn markets. The confirmation also considers the Company’s modest, although resilient earnings. Challenges include improving earnings capacity as well as controlling costs as it builds out its business banking franchise. Additionally, while Astoria has grown core deposits, the Company remains dependent on a significant level of wholesale funding.

The Stable trend encompasses DBRS’s belief that Astoria’s balance sheet metrics are improving. Balance sheet shrinkage has led to improving capital metrics. However, the corresponding reduction in earning assets has also pressured earnings. An inflection point in loan portfolio shrinkage combined with a relatively stable net interest margin (NIM) are likely to contribute to improving net interest income going forward. However, an expense spend around commercial banking initiatives will likely cause an increase in noninterest expenses over the coming quarters, pressuring earnings, which may be partially offset by a reduction in certain expenses following the bulk sale of nonperforming loans (NPLs). While DBRS views these ongoing strategic initiatives as a logical and necessary evolution for the Company, there is the potential for negative ratings pressure should Astoria be unable to deliver a consistent and higher level of core earnings.

Astoria’s spread-driven, relatively thin margin business mix and additional pressure from a reduction in earning assets has led to a sharp drop in revenues and declining earnings over the last few years. Net income available to common shareholders in 1H14 totaled $49.5 million, up from $26.7 million in 1H13, although a lower provision for credit losses and change in New York state tax legislation drove the decrease. On a core basis, as measured by a DBRS-calculated income before provision and taxes (IBPT, excluding securities gains and one-time expenses), 1H14 IBPT declined 4.1% as compared to 1H13 and remains pressured by declining interest earning assets and costs associated with business initiatives.

Largely reflecting residential mortgage loan prepayments, average earning assets declined 3% in 1H14 as compared to 1H13. However, while continuing to decline over the last quarter, the pace of decline has moderated as average earning assets declined just 0.3% from 1Q14 averages. Future earning asset growth is expected to be driven by multifamily and commercial lending. DBRS views positively the diversification this brings to the portfolio, although multi-family lending in New York has become a crowded lending space with a number of industry-focused as well as recent entrants competing for these types of loans. Astoria is focused on the rent controlled/rent stabilized market in New York City, which historically has performed well, and multifamily loans are being added at more attractive margins than other loans or securities, helping to improve the Company’s NIM.

Although Astoria’s nonperforming asset (NPA) level remains elevated relative to its historically very low levels, credit costs remain moderate and highly manageable. Moreover, the Company’s credit metrics will improve significantly following the 3Q14 bulk sale of NPLs, which will cut NPA levels by over half and lower both foreclosure expenses and future FDIC insurance premiums.

Astoria’s funding and liquidity profile remains acceptable, in DBRS’s view. The Company maintains a relatively high wholesale funding reliance, which is typical for many thrift institutions. Additionally, while average deposits have been contracting the mix continues to improve, reflecting the Company’s efforts to grow business banking deposits, as well as other initiatives. Astoria’s high quality securities portfolio, which represents around 15% of total assets, along with the Company’s access to the Federal Home Loan Bank 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 June 30, 2014, the Company’s tangible common equity to tangible asset ratio was 8.12%, an increase of 40 basis points from YE13, due to earnings retention as well as a modestly smaller balance sheet. Additionally, Astoria Bank’s regulatory capital ratios are comfortably above “well capitalized” levels.

Lake Success, New York-headquartered Astoria had $15.7 billion in assets and $9.7 billion in deposits as of June 30, 2014.

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 (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies.

The primary 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 Union.

Lead Analyst: John Mackerey
Rating Committee Chair: William Schwartz
Initial Rating Date: 23 December 2009
Most Recent Rating Update: 9 December 2013

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