Astoria Needs a Friend

Astoria Financial(AF) is in desperate need of a white knight.

The 118-year-old New York metropolitan-area lender continues to struggle, even as several of its local competitors have been snatched up in deals that have fetched lofty premiums. Investors in the forlorn thrift are hoping it won't be long before some suitor comes knocking on Astoria's door.

That's because after Astoria's most recent earnings report, there's a big question about how much longer it can remain independent. Astoria's 86 branches in New York City's outer boroughs and Long Island would be an attractive pickup for a number of banks eager to build market share in New York.

Last week, the Lake Success, N.Y., thrift reported its fourth straight disappointing quarter. In the third quarter, the thrift said profit fell 31% to $41 million, or 43 cents a share -- falling 2 cents short of the Thomson Financial consensus forecast. On Friday, shares fell 43 cents, or 1.4%, to $29.57.

To make matters worse, the lender's net interest margin -- a measurement of the profitability of its lending and deposit business -- shrunk to 1.75%, one of the skimpiest in the banking sector.

Banks such as Astoria, which make a majority of their profits from lending to consumers and commercial businesses, have seen earnings decline over the past two years as a result of the flattening yield curve -- or the narrowing of the spread between short-term and long-term rates. The narrow spread has been making it difficult for Astoria to generate meaningful profits by reinvesting customer deposits into higher-yielding assets.