Few bankers have been looking forward to the end of the refinancing boom as much as Astoria Financial Corp.'s George L. Engelke Jr.
The Lake Success, N.Y., company's traditional thrift business suffered badly from falling rates over the last year, but the worst is over, Mr. Engelke said in an interview last month.
Rising mortgage rates promise to turn the $22 billion-asset company more profitable. Just don't expect striking changes to its business model.
Mr. Engelke, the chairman, president, and chief executive, said he sees no reason to alter strategies. "Our core businesses are still what they were," he said. "We are not looking for monster projects."
Notably, Astoria continues to say it does not want to build new branches, even though several competing companies have been shoving their way into its Long Island turf.
These include Commerce Bancorp of Cherry Hill, N.J., and the thrift giant Washington Mutual Inc.
Commerce has 14 branches on Long Island and plans to open another 20 there by August. Washington Mutual, which entered the New York City area in 2002 by acquiring Dime Bancorp., also has plans to add branches in the area.
All but 10 of Astoria's 86 branches, on the other hand, have come by way of acquisitions made between 1973 and 1998. It opened its last new one in 1977.
Mr. Engelke said he doubts there are enough customers to make all the branch-building by his rivals profitable, and he predicts the upshot will be branch closings. Having too many branches "does not make anybody a winner," he said.
He concedes that Wamu is a formidable competitor, but he said Astoria's name recognition and service will help it retain customers.
There are some subtle changes underway.
Astoria made strides in recent years to diversify its loan book from residential mortgages to apartment-house loans, commercial real estate, and construction loans. And it expanded its offerings beyond banking services to include products such as annuities - though Mr. Engelke said he does not expect them "to run the bank."
Mr. Engelke's influence at the company dates back to 1971, when he joined it as treasurer from Peat Marwick Mitchell & Co., its outside auditor. He was promoted to chief executive in 1989, and became chairman in 1997. At 65, he has no clear successor.
Analysts and investors said they appreciate that Astoria has stuck close to its roots: mortgage lending and deposit-gathering. "It seems to me a lower-risk type of investment," said David W. Allaire, a portfolio manager at Mystic Asset Management Inc. of Warwick, R.I., who said he holds Astoria stock in several portfolios.
But many observers call a takeover inevitable. Mr. Allaire said that possibility adds "icing to the cake."
There has been plenty of speculation about mergers and acquisitions in metropolitan New York lately, including two recent deals involving Astoria competitors. In October, Roslyn Bancorp. of Brooklyn was sold for $1.6 billion to New York Community Bancorp. Inc. of Westbury. And late last month Independence Community Bancorp. in Brooklyn said it had agreed to buy Staten Island Bancorp. for $1.5 billion.
Asked whether he would sell, Mr. Engelke said what most in his position would: yes, if the price were high enough.
During the 1990s, Astoria was a buyer. Its last acquisition was in 1998, for $6.6 billion-asset Long Island Bancorp Inc. It did two other deals before that, after going public in 1993.
But buying would be a little harder now for Astoria given that its price-to-earnings ratio (its stock is trading at 14 times earnings) is low compared with other buyers'.
"If you have price-earnings ratios that are out of line, I can't do an economic deal in most cases. So I can't acquire," Mr. Engelke said. "And that's the way this has been over the last couple of years. It has not been an acquirer's market."
That situation may not change anytime soon, said Mark Fitzgibbon, the co-director of research at Sandler O'Neill & Partners LP because thrift stocks historically trade at a discount to bank stocks.
"The management team at Astoria is pretty disciplined in doing acquisitions," Mr. Fitzgibbon said. When management at a company with a depressed stock price is reluctant to pay premiums, acquisitions are difficult - especially in a market like New York that has buyers with stronger currencies and a willingness to pay up.
But how will Astoria boost revenue and profit and expand without buying or selling?
Observers agree that its branch network and deposit-gathering skills can hold up to increasing competition. And analysts expect earnings to jump next year to $3.12 a share; some have a forecast as high as $3.40.
Mr. Fitzgibbon said he thinks Astoria "can do a reasonable job of continuing growth and expansion."
Other analysts are not so sure. "The company has not really addressed forcefully" how it expects to grow, said Anthony R. Davis of BankAtlantic Bancorp.'s Ryan Beck & Co. Inc. in Livingston, N.J.
Mr. Engelke told investors at a November conference in Florida sponsored by Sandler O'Neill that loan demand should remain strong, and that will help. He also predicts that fewer homeowners will pay down their mortgages early, a trend that exacerbated Astoria's problems this year because it did not jump on the refi bandwagon. "We did not push originations like crazy," he said.
Astoria also stands out because it has refused to amass securities on its balance sheet to offset an earnings slowdown. Despite the potential for short-term gains, the hedging would have been "an economic loss" down the road, Mr. Engelke said.
Such conservatism took a toll on earnings. Models calculated by analysts have its full-year 2003 earnings per share at $2.40, which would be down 16% from last year, according to Thomson First Call.
But relief may be in sight. The refi boom appears to be over after a sharp rise in the yield of the benchmark 10-year Treasury note. Demand for purchase mortgages, meanwhile, is up, Mr. Engelke said.
Though in January 81% of its one- to four-family loan applications were for refis, that proportion fell to 50% by August, Mr. Engelke told the Florida conference. During the same time, purchase-mortgage-application volume rose 50%, to $260 million.
The trend should continue, Mr. Engelke said. And demand for multifamily and commercial loans - which rose 24% in the third quarter from a year earlier, to $2.9 billion - is also strong.
Multifamily and commercial loans make up nearly 25% of Astoria's loan portfolio; the rest consists of one- to four-family mortgages (72.1%) and consumer loans (3.4%), according to its third-quarter earnings report.
Mr. Engelke listed other factors that bode well for earnings next year. There is $3.3 billion of debt that will mature in the first half of 2004 and it will either be eliminated or renewed at much lower interest. Almost $2 billion of higher-rate certificates of deposit will also mature, and with the federal funds rate low Astoria will have the chance to funnel it into lower-paying CDs.
To many analysts, this is a big key to reviving profit. Repricing debt and deposits could improve Astoria's net interest margin, the average rate earned on its loans, by 110 basis points next year, said Ryan Beck's Mr. Davis. That would be "awesome," he said, considering that the margin fell 73 basis points in the third quarter, to 1.52%.
Rising mortgage rates will also help Astoria's mortgage-servicing portfolio. When mortgage rates fall, the life of mortgages shortens because customers repay early and servicing rights amortize faster than expected. Other customers refinance at lower rates, forcing their servicing company to take impairment charges.
Astoria took $13 million of charges to its servicing portfolio last year because of this trend and $4.5 million in the first nine months of 2003. But such charges vanish when mortgage rates rise, and some of Astoria's impairment provision can be recovered. Mr. Engelke downplayed the impact of a mortgage-servicing rights recovery on earnings, though he did call it "a positive addition."
On top of that, "Astoria, unlike most thrifts, tends to do very well in a slowly rising interest rate environment," said Sandler O'Neill's Mr. Fitzgibbon, because its bread-and-butter business is adjustable-rate mortgages, which reprice faster than its own costs of funds.
But Mr. Davis said a turnaround next year is as much about changes in economic conditions as decisions made by Astoria's management. "At least for the next year or so, they don't really have to worry" about earnings growth and business strategy, he said. "The company really is on autopilot right now."
