Most financial institutions are being squeezed to some degree by the combination of a flat yield curve and rising interest rates, but thrifts are feeling the most pain.
Unable to reprice mortgage loans fast enough to keep up with rising deposit costs, many thrifts reported steep margin and earnings declines in the first quarter - and analysts do not see conditions improving much this year.
Jared Shaw, an analyst in Hartford, Conn., for Keefe, Bruyette & Woods Inc., said that even if the Federal Reserve stops raising interest rates, many thrifts might not have earnings gains until 2007, "when hopefully there's a steeper yield curve."
Thrifts with more of a commercial mix fared better, because they had more low-cost core deposits from business customers, higher-yielding commercial loans, and fee income from cash management and other business services, Mr. Shaw said.
Also, some thrifts countered the effects of margin contraction by buying back shares to increase earnings per share. In fast-growing markets, some thrifts - such as BankUnited Financial Corp. in Coral Gables, Fla. - actually reported increases in net interest margins.
But by and large it was a forgettable quarter for many thrifts. Ryan Beck & Co. in Florham Park, N.J., said in a research report issued Tuesday that 50% of the thrifts it covers had missed analysts' earnings-per-share estimates in the first quarter. Net income fell an average of 6% from a year earlier, and earnings per share 4%. Only 14% of the thrifts it covers exceeded estimates.
At the $3.8 billion-asset Partners Trust Financial Group Inc. in Utica, N.Y., net income fell 10%, to $5.6 million, as an increase in deposit costs, coupled with the continued flat yield curve, led to a 6.8% drop in net interest income. Its net interest margin fell 38 basis points, to 2.72%.
"Their margin had a pretty big contraction, and it's going to continue," said Laurie Hunsicker, an analyst at Friedman, Billings, Ramsey & Co. Inc. in Arlington, Va. "Furthermore, their previously forecasted commercial loan growth didn't happen, as smaller companies got very aggressive in pricing and Partners decided not to compromise their underwriting standards and chase the loans."
Commercial loans fell 7%, to $471 million. The $494 million-asset Peoples Bancorp of Auburn, Ind., said that its net income fell 30%, to $711,450, largely because of margin contraction.
It was a similar story at the $3.5 billion-asset Bank Mutual Corp. in Milwaukee. Its earnings fell 32%, to $5.4 million, because of a 45-basis-point decline in its net interest margin.
The $29.7 billion-asset Hudson City Bancorp Inc. in Paramus, N.J., did much better than most thrifts; its first-quarter earnings rose 21.5%, to $75.2 million, largely because of its size. Though it too experienced a margin decline, a 41% increase in interest-earning assets - mainly loans and mortgage-backed securities - more than offset the drop.
Hudson City also bought back 9.2 million shares, which helped boost earnings per share by 27%, to 14 cents. Its earnings should increase further once it completes its acquisition of Sound Federal Bancorp Inc. in White Plains, N.Y., Ms. Hunsicker said. It is expected to close in the summer and be accretive to earnings in 2007. The deal was announced Feb. 9.
The $12.2 billion-asset BankUnited was among the few publicly traded thrifts that reported a margin expansion - from 1.75% in the first quarter of 2005 to 2.08% in this year's first quarter.
Ms. Hunsicker said that BankUnited's margin grew because it aggressively added loans and priced the majority of them using the lagging Monthly Treasury Index. "Their results are staggering, well ahead of analysts' consensus, and we don't often see that in the thrift world."
BankUnited's earnings rose 45%, to $19.7 million, on strong growth in both loans and core deposits. South Florida is one of the fastest-growing markets in the country, and BankUnited had been able to rapidly increase both its retail and commercial business, Ms. Hunsicker said.
Jeff Davis, an analyst at First Horizon National Corp.'s FTN Midwest Research Securities Corp. in Nashville, said that despite the difficulties thrifts are facing, most are still profitable because their credit quality and balance sheet management are strong.
He said a case in point is the $22.2 billion-asset Astoria Financial Corp. in Lake Success, N.Y. Its net income fell 17%, to $48.9 million, but its return on equity was 14.77%, well above average for thrifts these days.
Mr. Davis said that Astoria manages its balance sheet well by offering more certificates of deposit with longer durations, reducing the amount of borrowings and investment securities, and continuing to buy back shares.
"Relative to what thrifts were earnings two years ago, it's miserable," he said. "But from a longer-term perspective, many thrifts are still very profitable."
