Fourth-quarter earnings were lackluster at many thrift companies, and the forecast for the first part of this year looks similarly glum.
The difficulties stem from a widening gap between short-term interest rates, which determine funding costs, and long-term rates, which determine yields on earning assets. Short-term rates are rising, while long-term rates are stuck in neutral.
Though the trend affects commercial banks, too, it is particularly acute at savings banks, which make fewer higher-yielding commercial loans and pay more for their deposits than commercial banks.
“In general, when you’re looking at a thrift, you’re looking at a company that is more competitive in the deposit rates they pay,” said Wilson L. Smith, an analyst at Boenning & Scattergood Inc. in West Conshohocken, Pa. Thrifts must offer higher rates because their depositors “shop around.”
This year profitability at many thrifts will depend largely on how closely they manage their balance sheets, how tightly they control expenses, and, perhaps most importantly, how successful they are in adding higher-yielding loans to their portfolios.
Dime Community Bancshares Inc. of Brooklyn, N.Y., for example, is struggling with falling yields in its flagship multifamily lending portfolio.
The $3.4 billion-asset company’s reported fourth-quarter net income rose 3% from a year earlier but fell 9% from the third quarter, to $10.2 million. (Full-year earnings fell 10%, to $46.2 million.)
In an earnings conference call Wednesday, Dime’s executive vice president and chief financial officer, Kenneth J. Mahon, said $500 million of apartment loans repriced downward last year, to an average rate of 5.05%, from 6.9%.
Dime has responded by scaling back on multifamily originations and increasing its focus on higher-yielding commercial real estate loans. Commercial real estate will not replace apartment lending as the primary business line, but the percentage of commercial real estate loans in Dime’s portfolio will probably grow this year, according to its president and chief executive, Vincent F. Palagiano.
Along the same lines, Joseph R. Ficalora, the president and CEO of the $24 billion-asset New York Community Bancorp Inc. — the area’s largest multifamily lender — said it wanted to expand in construction lending, a business it entered when it bought Roslyn Bancorp Inc. in 2003.
The Westbury company’s fourth-quarter earnings fell 26%, to $83.5 million. Full-year profit rose 10%, to $355.1 million.
Mr. Ficalora said New York Community would continue to struggle until long-term rates begin climbing.
They “don’t seem to be doing what people expect them to do,” he said Wednesday at a New York conference sponsored by Citigroup Inc.’s Smith Barney. “Your guess is as good as mine as to when they’ll actually go up.”
Another New York thrift company, Carver Bancorp Inc., has added branches and worked to boost construction lending over the past year. (It likes construction loans because they reprice faster than other credits.) However, its net income for its fiscal third quarter, which ended Dec. 31, fell 23% from a year earlier, to $904,000.
Like other thrift executives, William Gray, the $616 million-asset Carver’s chief financial officer, attributed the decline to the rate environment.
“We’re all trying to get more asset sensitive,” he said. “If you can move out of one portfolio and into another to pick up some yield, that is great.”
The imbalance between long- and short-term rates and the resulting compression is also putting pressure on thrifts to change their strategies to manage their balance sheets differently.
Brookline Bancorp of Massachusetts said that as long as yields remain stuck it is buying only investments with durations of two years or less. The policy has been a drag on earnings (longer-term investments pay more), but limits rate risk.
Though residential mortgages remain the largest component of Brookline’s loan portfolio by far, the $1.7 billion-asset company is making more commercial loans. The amount of such credits on its books grew 76% last year, to more than $51 million.
The addition of higher-yielding business loans helped Brookline do better than most thrifts. Its fourth-quarter profits rose 18% from a year earlier, to $4 million, and full-year profits rose 23%, to $17.8 million.
While Dime is managing the balance sheet by cutting back on originating multifamily loans, New York Community has taken a different approach. Mr. Ficalora said that it is originating as many multifamily loans as it did last year, despite the lower yields, and it plans to cut costs to make up the difference.
That would be a challenge, since New York Community’s efficiency ratio is already below 25%, but he said reducing expenses is one of the surest ways to produce a bottom-line effect when margins are shrinking.
