Astoria Financial in Lake Success, N.Y., reported a 40% increase in second-quarter earnings as stronger fee income from mortgages helped it overcome a considerable shrinkage in loans.

Astoria's net income for the quarter was $31.4 million, or 29 cents per share.

Loans fell 5.1% from a year earlier, to $11.6 billion. One of the reasons was a $1.1 billion, or 15%, drop in residential loans caused by an "elevated pace of prepayment activity" on real estate loans during the first half of the year.

"During the second quarter, we experienced a sharp increase in prepayment activity in our [multi-family/commercial real estate] loan portfolio, due in part to some of our competitors' willingness to offer more cash on loans, or loosened covenants, terms that we did not feel comfortable offering in the current interest rate environment," said the $15.3 billion-asset bank's president and chief executive Monte Redman.

Astoria, which places an emphasis on providing banking services to support New York's real estate market, is vulnerable to fluctuations in the multifamily and commercial real estate portions of its portfolio, which comprises 42% of Astoria's total loans.

Net interest margin increased by four basis points, to 2.35%, but the decline in total loans pushed net interest income down slightly, to $85.2 million.

Noninterest income rose 10.8%, to $15.3 million, thanks to mortgage-banking-related fees, the company said. Noninterest expense for the bank rose less than 1% to $71.9 million.

Redman lamented the drop-off in loans but was upbeat about other areas. Though overall deposits dropped 4%, to $9.3 billion, the CEO said Astoria added commercial deposits as part of its effort to let higher-cost deposits run off and replace them with less costly ones. The bank highlighted 16% growth in "highly desirable business checking account balances," with total business deposit of 22%.

Astoria also said that commercial lending has grown 49%, leading it to plan a new branch in Long Island City, Queens to further support business banking operations.

Meanwhile, Astoria on Thursday named Robert Giambrone, a former executive and board member at the investment bank Keefe, Bruyette & Woods, to its board the same day the bank's second quarter earnings were announced.

Giambrone held multiple leadership positions at KBW between 2002 and his retirement in 2013. Astoria did not indicate in its press release whether a new seat on its board was created for Giambrone or if he replaced another director.

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