DBRS Initiates Coverage of Astoria Financial Corporation – Issuer & Senior Debt at BBB

DBRS has today initiated coverage of Astoria Financial Corporation (Astoria or the Company). DBRS has assigned a rating of BBB to Astoria’s Issuer & Senior Debt and a rating of BBB (high) to the Deposits & Senior Debt of Astoria Federal Savings and Loan Association (AF or the thrift), Astoria’s thrift subsidiary. Moreover, DBRS has assigned a Short-Term rating of R-2 (middle) to Astoria and an R-2 (high) to AF. The trend on all ratings is Stable.

With a legacy dating back to 1888, and headquartered in Lake Success, New York, AF is the largest thrift depository in Long Island. Astoria’s two primary businesses are mortgage lending and retail banking. The Company’s niche business, mortgage lending, is national in scope and focused on the origination and purchase of first mortgage loans secured by one-to-four family residences. To a far lesser extent, the Company originates multifamily (mostly rent controlled/rent stabilized properties) and commercial real estate (CRE) loans in the New York City metropolitan region.

The mortgage lending business originates and purchases loans through multiple distribution channels, including the Company’s loan production offices in New York, a broker network covering seventeen states and a third party loan origination program of correspondents covering eighteen states. Astoria’s retail banking business provides products and services through 85 full service offices in Long Island, Brooklyn, Queens, and to a lesser extent Westchester County, New York. At September 30, 2009, Astoria had total assets of $20.7 billion, gross loans of $15.9 billion and deposits of $13.2 billion.

Astoria’s ratings are underpinned by its relatively sound asset quality, acceptable capital and liquidity positions, and seasoned management team. Ratings also reflect the Company’s pressured earnings generation capacity.

DBRS views Astoria’s asset quality as sound, even with recent deterioration from a difficult operating environment. Astoria’s residential mortgage portfolio, which represents 76% ($12 billion) of total loans, consists primarily of jumbo prime hybrid adjustable rate mortgages, of which 82% and 18% are full documentation and reduced documentation loans, respectively. In light of the steep downturn in the housing markets and high unemployment, non-performing assets (NPAs) represented 2.95% of total loans at September 30, 2009, up from 2.42% at June 30, 2009. Meanwhile credit losses remain manageable. During Q3 2009, net charge-offs (NCOs) represented 0.84% of average loans, down from 0.96% for the prior quarter. The Q3 2009 NCOs mostly reflected one-to-four family residential mortgages. Meanwhile the bulk of the increase in nonaccruals was related to higher levels of interest-only residential mortgages and interest-only multifamily and CRE exposures. Although Astoria’s loan loss reserves to NPAs are fairly low at 39%, DBRS notes that $196 million of the Company’s $408.5 million of nonperforming loans have been written down to fair value.

Astoria’s capital position provides adequate loss absorption capacity, at current loss rates. At September 30, 2009, AF’s leverage, Tier 1 and Total risk based capital ratios were 6.72%, 11.49% and 12.77%, respectively. Moreover, the Company’s tangible common equity to tangible asset ratio was 4.98%. Astoria did not participate in the Treasury’s CPP. DBRS notes management’s high level of ownership in the Company, which positively influences Astoria’s conservative management style.

Astoria’s liquidity position is acceptable, yet pressured by a sizeable component of wholesale funding. The Company’s good quality securities portfolio, which represents roughly 17% of total assets, access to the FHLB and the Federal Reserve round out its liquidity profile. The holding company’s fundamentals are adequate, albeit double leverage is high at 127% and the Company is required to obtain approval from the OTS to upstream dividends from AF to the parent.

Except for one quarterly loss, Astoria has been profitable throughout the economic cycle. During Q3 2008, Astoria reported a $16 million loss, due to sizeable non-recurrent securities related charge (Freddie Mac preferred stock). That said, the Company’s earnings generation capacity remains pressured by high credit costs, a narrow net interest margin (NIM), and a moderate degree of revenue diversity. Although the Company’s NIM narrowed on a sequential quarter basis, DBRS anticipates that Astoria’s margin will improve over the next few quarters, driven by lower deposit costs. Moreover, credit costs should moderate over the near-to-intermediate term, as the Company’s asset quality deterioration is expected to decline.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.