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.
"They've done the right thing by deleveraging the balance sheet and buying back stock," says Anton Schutz, president of Mendon Capital Advisors and the fund manager to Burnham Financial Services, which owns shares of Astoria. "They've done everything else right. The last thing they can do is sell the company."
It's tough to look into a crystal ball and predict when a company agrees to an acquisition. But some say Astoria's management may have missed the boat on a buyout and no longer can look for a rich premium. Part of the problem is that much of the potential takeout price for the bank is already baked into the stock.
At best, observers say the bank can get between $35 and $39 a share, which represents an 18% to 32% premium to Friday's closing price. Most say, however, that $39 a share is likely an overly optimistic number. The bank would not comment on the buyout speculation.
Jim Ackor, an analyst at Royal Bank of Canada's RBC Capital Markets, is pessimistic on the stock.
"It's fair to presume that the company is worth considerably less in an acquisition today than it would have been two years ago," says Jim Ackor, an analyst with RBC Capital Markets, who has an underperform rating on the stock. "I'd be very surprised if anybody out there is willing to pay above what the stock is trading at right now."
Astoria's stock looks rich compared to its peers. It's trading at a price-to-earnings multiple of 15.83 times current earnings, compared to an average P/E of 14.65 for other savings and loans, according to Thomson Financial.
The thrift trades at a price that's roughly 2.39 times its book value -- assets minus debts and liabilities. By contrast,
North Fork Bancorp
( NFB)" EXCHANGE="NYSE" PRIMARY="NO"/>, the New York-area thrift that Capital One is paying $14.6 billion to acquire, trades at a price/book ratio of 1.5. The deal for North Fork carried a 22% premium.
North Fork's price/book ratio is unusually low. But it's hard to imagine any buyers paying that much more for Astoria.
However, others say that with North Fork being taken out by Capital One and
( SOV) purchase of
Independence Community Bank
, there aren't too many sizable franchises left in the New York market besides Astoria. That "scarcity value" could boost Astoria's takeout price.
"Their branches have been built up over a long period of time," says Mark Fitzgibbon, the director of research at Sandler O'Neill. "They have been very selective where they have opened and are in very densely populated areas."
Still, Fitzgibbon downgraded the stock Friday to hold from buy because he expects continued net interest margin compression next year.
Large banks such as
are possible buyers. But smaller regional players such as
of Portland, Maine, also could be suitors.
Despite all the noise surrounding Astoria's fate, George Engelke, the bank's chairman and CEO, is not ready to concede defeat.
"We keep fighting a good fight and we will win," said Engelke in a conference call Friday to discuss third-quarter earnings.