Thrifts Face Crossroads with New Capital Rule

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Maybe George Bailey should've jumped — and made his savings and loan a commercial bank.

If he had, he'd have been much better prepared for the Federal Reserve's recent decision to raise certain capital requirements, a move some are calling the death knell for the classic thrift business model: lend to home buyers like crazy.

"We believe that regulatory changes following the financial crisis … have ended the viability of the thrift industry," analysts at Keefe, Bruyette & Woods wrote last week. "Higher capital requirements will not support the revitalization of the thrift industry, in our opinion, and as a result the industry will continue to fade away."

Thrifts have historically focused on residential loans, pretty much to the exclusion of all else. Maintaining high leverage allowed thrifts to post profits in spite of low margins and negligible fee income, said Frederick Cannon, Keefe Bruyette's chief equity strategist.

No longer. With residential real estate values battered by recession, such mortgages are now a higher-risk asset class, and many thrifts are dramatically reducing their dependence on home loans, in favor of different revenue streams.

In 2006, for example, the median ratio of residential mortgages to total loans at the 20 biggest thrifts was 78%. At March 31 of this year that ratio stood at just 61%, according to KBW.

The trend is likely to continue. The Fed's decision to adopt international capital standards promulgated by the Basel Committee on Banking Supervision will push even more thrifts to abandon the old thrift model, Cannon says. Banks have until 2019 to comply with the Fed's new capital requirement.

The declines are apparent at some of the biggest thrifts.

Flagstar Bancorp in Troy, Mich., reduced its ratio of residential mortgages to 72% at March 31, from 90% in 2006.

At Investors Bancorp the ratio fell to 58% at the end of the first quarter, down from 90% in 2006. The $11 billion-asset Short Hills, N.J., company on Monday said it would buy Marathon National Bank, which has 13 branches around New York.

A number of small thrifts, meanwhile, have abandoned their old ways by scrapping their thrift charters, getting out of the residential mortgage business, or both. ViewPoint Financial Group, a $3.5 billion-asset banking company in Plano, Texas, earlier this month agreed to sell its home-lending unit to a nonbank mortgage lender. ViewPoint converted to a commercial bank charter last year, abandoning its thrift charter.

The $9.5 billion-asset Sterling Financial in Spokane, Wash., became a commercial bank in 2005 and has since reduced its exposure to single-family mortgages. The company in February dropped "Savings" from the name of unit Sterling Bank, severing any ties to its days as a thrift.

And Greene County Bancorp retains a savings association bank charter, but it has operated more like a commercial bank since the late 1990s, said Don Gibson, the Catskill, N.Y., company's president and chief executive. While one- to four-family residential loans still make up about 71% of the $579 million-asset company's loan book, Greene County has been putting more emphasis on its commercial lending, he said.

"Everyone has to find their niche, and the traditional thrift model doesn't work well for us," Gibson admitted. "Just because you're chartered as a thrift doesn't mean you are a thrift."

Some savings and loans are digging in their heels.

"A lot of our peers have moved in the direction of being a commercial bank," said Peter Boger, the chairman, president and chief executive of Ridgewood Savings Bank in Queens. "I don't see that happening anytime soon here."

Boger's $4.8 billion-asset institution is the largest mutual thrift in New York. "The thrift is alive and well at Ridgewood," he said.

Douglas Faucette, a banking lawyer at Locke Lord, said many smaller thrifts have stuck to their guns and continue to focus on one- to-four-family residential real estate loans. And the stricter capital standards won't cause these small thrifts to blink an eye, he said.

"If you look at the financials of community thrifts, they could care less about Basel," Faucette said. "The whole concept of additional and supplemental capital is foreign to them. They've always been overcapitalized."

Ridgewood, which has more than two-thirds of its loan book in the first quarter in one- to four-family residential loans, already surpasses the Basel capital requirement, Boger says. At March 31, Ridgewood posted a total risk-based capital ratio of 23.8% and a leverage ratio of 12.2%.

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Comments (3)
One really needs a roadmap to separate the wheat from the chaff in this article. In fairness, the misleading portions are from dust thrown into the air by "sources."

What is completely true are the statements made by Peter Boger that the thrift model is alive and well in the hands of managers who know how to execute, and Doug Faucette's comments about the thrift industry's strong capitalization. Also, Don Gibson's comment that the thrift charter can accommodate more than one business model is spot on.

What doesn't pass muster is the comment that thrifts depend on high leverage; as a rule, the opposite is true. And the wrong conclusions are drawn from the charter conversions. A check of FDIC data shows that Sterling wasn't a thrift at all, but a state-chartered savings bank that since 1995 had been classified by the FDIC as a commercial lender. ViewPoint Bank was formed when Community Credit Union converted to a thrift on 2005. ViewPoint immediately set out to transform its credit union portfolio to that of a diversified bank, so its most recent change says nothing about abandoning a traditional thrift model.
Posted by Bob Davis | Friday, June 15 2012 at 9:58PM ET
Some thrifts have been de-facto akin to commercial banks for a long time. Look at Raymond James. Once per year they basically "skirt" the QTL test in order to momentarily look like a thrift so they can continue with the "benefit" of not having to comply with Holding Company capital rules. This annual event benefits from an IRS rule (i.e., DBLA test) which can be used IN PLACE of the QTL test; a rule Congress always likes to ignore but more thrifts SHOULD exploit (RJF is smart to do this in order that they NOT be constrained by nonsensical Congressional meddling). Had Guaranty Bank in Austin, TX used this rule instead of loading up on $3.5 billion in private label non-agency RMBS in order to MEET the QTL test, perhaps certain shareholders would still have their money.

What many neophytes like Andy and others don't get is that the OTS - like many regulators - had been "skirting" the spirit of the law for a long time, and thank goodness for this. It is CONGRESS that made the non-market clearing "rule" that in order to have structural advantages over the national and FRB holding company supervision, the OTS - an agency with DUAL responsibility of the bank charter and the holding company - should be preserved.

The OTS - for YEARS - lobbied Congress for expanded powers under the HOLA. Congresspeople - like Barney Frank - would have nothing to do with it. These politicians are the real dangers to ALL industry (not just banks); congressmen that pass legislation for their own agendas, not that of We the People. The OTS was a weak regulator not because they couldn't have been strong, but due to structural nuances and flaws in the law that allowed these charters to exist. These nuances and flaws in statutory rules are potentially even more prevalent under the Dodd-Frank Act (DFA). What is needed is more fact-based policy-making rather than the whistling in the dark that seems to be our collective heritage and, if things continue as is, our collective future.
Posted by Stentor | Monday, June 18 2012 at 7:53AM ET
Bob, your comments highlight that it's not crystal clear what is a thrift and what isn't. In its 2006 annual report, Sterling Financial says it "completed the conversion of its charter from a thrift to a commercial bank holding company in July of 2005." The FFIEC says "Savings Banks ; Savings and Loan Associations ; Credit Unions are examples of Thrift Institutions". However, Eastern Bank of Boston is chartered as an FDIC Savings Bank, but Eastern Bank Corp. calls itself a "holding company" and not a thrift. A list that the OCC provided me, which the agency described as a list of all thrifts, excludes several institutions that call themselves thrifts, including Ridgewood Savings Bank and New York Community Bank. -Andy Peters, community banking reporter, American Banker.
Posted by Andy Peters | Tuesday, June 19 2012 at 12:15PM ET
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