Deleveraged, repositioned, and nimble.

After a year of rising short-term and tumbling long-term interest rates, bankers and investors are extolling the virtues of being smaller.

Size certainly is still valued and aggressively sought after - as evidenced by FDIC figures showing that the largest banks have dominated asset growth over the last two decades. But for the past year, despite a roaring economy, the inversion of the yield curve has, for thrifts in particular, stifled growth opportunities.

It's not just thrifts. J.P. Morgan & Co. and FleetBoston Financial Corp. both ended the second quarter with fewer assets than they had in the prior year. Fleet has been whittling back ever since the merger between Fleet Financial and BankBoston that created the company.

J.P. Morgan, on the other hand, has become a rather unlikely advocate of a lack of heft, given that it remains the fifth-largest banking company in the United States, with assets of around $266 billion at quarter's end.

Of course, size is relative. It was during the company's post-earnings conference call in July (J.P. Morgan was one of a very few banks to report much higher than expected earnings) that chief financial officer Peter Hancock said, "What we have to be mindful of is flexibility is extremely important in rapidly changing markets. Scale without consideration is quite dangerous." His comments, it should be noted, came in response to questions about the UBS-PaineWebber merger agreement, announced that same day.

But for thrifts, the issue is a central strategic one right now. Charter One Financial Inc., Sovereign Bancorp, and Astoria Financial Corp. are just some of the companies that have spent the better part of the past year, or longer, engaged in "repositioning" efforts that more often than not involve disposing of securities positions and, in some cases, lying low on loan growth.

Astoria Financial appears quite content to wait out the cycle, however long that takes. "We just don't want to put on credit risk at least until there is some kind of steepening of the yield curve," said Peter J. Cunningham, first vice president for investor relations. "At a time when there is simply not that much opportunity for growth, we've adopted a strategy of keeping the balance sheet stable."

Stable, or smaller. Astoria, too, has run about $1 billion in assets off of its $22 billion balance sheet over the past year, mainly through roll-offs of mortgage-backed securities. For now, buying back stock makes far more sense now than replacing those securities in the portfolio, which has shrunk to $8.4 billion, from about $10.5 billion, Mr. Cunningham said.

The strategy is not without some short-term pain. In Astoria's second-quarter earnings release, chairman and chief executive George L. Engelke, Jr., dispensed with euphemism and said explicitly that if the interest rate picture does not change "and spread opportunity for asset growth remains narrow, we may limit our asset growth or shrink the balance sheet, as we have been doing over the past 15 months." That could mean margin pressure and lower net interest income, he said.

Wall Street applauded the move, which may have come as a surprise to some, given the widespread view that analysts and investors push managements to watch the next quarter at the expense of the long-term. At Salomon Smith Barney, analyst Thomas O'Donnell reiterated a "buy" rating on the stock.

"It is our view that a strategy of adding lower-yielding assets to the balance sheet, in order to grow earnings in this environment, is one for which investors have not and will not pay up," he said, adding that the strategy was one that some other companies would do well to mimic.

There have been signs over the last couple of weeks that the interest rate environment may finally be turning and the Fed's tightening cycle, by most estimations, appears all but over. Both of those may well indicate that a period of growth - and perhaps of prosperity - lies ahead for Astoria and its peers.

If not, at least at Astoria, the diet continues.

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