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What an Analyst Who Likes Astoria Financial Is Missing

Astoria's assets at the end of the third quarter were $16 billion, 32% below the fourth-quarter 2004 peak of $23.4 billion. Its assets in the first quarter of 2000 and the fourth quarter of 2008 were essentially the same, astonishing when you consider the robust asset growth many banks and thrifts delivered during this period. Sure, that robust growth turned out to be problematic or fatal for some institutions, but isn't 32% asset shrinkage awful?

While Astoria's asset shrinkage has slowed recently, it still has grown assets only three times over the past 12 quarters, and only once at an attractive level. The thrift has been shrinking its securities portfolio, shrinking its one- to four-family residential loan portfolio (not an especially lucrative loan category) and growing multifamily, commercial real estate and other loans, all in an attempt to boost its net interest margin. NIM has improved relative to the lows of 2007, but at 2.28% during the third quarter it's still slightly worse than the 2.40% way back in the first quarter of 2000.

Both are horrible in absolute terms (in fairness, this is a problem for many thrifts, not just AF). But here's the bigger problem: Astoria's non-interest expense has grown even as assets have shrunk. Its overhead is much too big for its current asset base. That will be a huge, ongoing drag on its returns on assets and equity.

If Astoria hits Kleinhanzl's $1 EPS estimate in 2015, that would give the bank roughly an 8% ROTCE in 2015, more if the thrift increases its dividend. That's better, but still far from good. Note that Kleinhanzl revised his 2015 estimate upward by 15 cents and his price target by $4. How does one map into the other? I have no idea.

If you assume that the entire 15-cent increase is paid as dividends, 4% dividend growth and a 7% discount rate gets you $3.51. But those are three very aggressive assumptions for Astoria. Kleinhanzl predicts 43% EPS growth for 2015. His 2015 estimate is far from a sure thing, but even if Astoria hits it, where does EPS growth come from after that? More net interest margin expansion? Asset growth?

I have to believe the 48% increase in Astoria's share price in 2013 is the real reason for Kleinhanzl's optimism. But Astoria's shares traded at 83% of tangible book value at the end of 2012. Enough investors considered it irrational for a thrift to trade below its theoretical "liquidation value," even one with a terrible ROTCE.

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