Sometimes you have to get smaller to get better. That would seem to be the lesson at Long Island-based thrift Astoria Financial (NYSE:AF). While some bank managers are obsessed with growing the balance sheet at almost any cost, this company is running down its securities portfolio and using it to pay down high-cost borrowings.
That decision looks to be at least part of why Astoria's business is holding up reasonably well. Net interest income was down 6% in the fourth quarter, but the company's net interest margin shrank only six basis points from a year ago. Now, I'll grant that a margin of 2.12% is somewhat low in absolute terms, but the stability is encouraging. Non-interest income was up almost 18% for the period, but constitutes a much smaller part of the bank's revenue.
All together, the bank's net income slipped about 4% from last year. Note that I'm comparing results with last year's operating earnings, as Astoria Financial took an impairment charge in that period. By that same standard of comparison, return on equity fell a bit from last year, and the return on assets was basically stable. And while the company's efficiency ratio ticked up a bit from last year's adjusted figure, a ratio of 37.6% is exceptional and a mark of very good cost control.
Looking at the balance sheet, the picture gets more muddled again. Loan growth was less than 10% and that's not so great. Likewise, deposit growth of less than 5% is even less great. Now I'll grant that this bank is a very good underwriter (in terms of long-run trends in non-performing loans and charge-offs) and it's managed the interest spreads fairly well, but that low deposit growth is a problem because that really is a bank's lifeline to cost-effective growth.
All in all, it wouldn't surprise me to see Astoria Financial get bids from larger banks looking to build up their presence in the region. Still, New York is a tough place to compete for deposits (look at whatCommerce Bancorp (NYSE:CBH) is doing), and the secular growth trends aren't all that great. A good dividend and an established history of buybacks might be reason enough to hang on, but I'd need a more attractive price relative to book value to buy in myself.
For more Foolish financial Takes:
- National City: Just Visiting, Thanks
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- A Closer Look at Bank Stocks
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
