Interest-rate plunge gives savings banks something to smile about

Falling interest rates are finally giving the corner savings banks a break.

The nation's thrift industry, after suffering through months of rising interest rates, has finally started to see a decline in the cost of its funds and in the amount it pays its depositors. Although this is bad news for savers, it ultimately means the savings banks will remain in business longer.

This has been a long year of red ink for the thrifts. In New York City alone, there are at least six major savings banks that are in danger of running out of their surpluses by the end of the year.

On the national level, the Federal Deposit Insurance Corporation (FDIC) says it has assisted in the merger of five savings banks so far this year. The Federal Savings & Loan Insurance Corporation (FSLIC) has assisted in 25 supervised mergers. Altogether, 361 federally insured associations have merged since last July. Many of these mergers have taken place without federal assistance.

Both the FDIC and FSLIC expect they will have to assist the merger of still more of the financial institutions since interest rates are falling too late for some lenders.

However, for most thrifts, the interest-rate drop is good news. Charlotte Chamberlain, director of policy and economic research at the Federal Home Loan Bank Board, says the average thrift can now become profitable in the next six to eight months at current interest rates.

In fact, the latest statistics released by the bank board are encouraging. The board reported on August 25 that in July the net outflow of funds from savings and loans slowed considerably.

The thrifts that will benefit most quickly from the drop in interest rates, says Stanley Silverberg, director of research and strategic planning for the FDIC, are those who have borrowed heavily and have a large number of certificates of deposit outstanding. As these are rolled over at lower interest rates, the thrifts will see their bottom lines improve quickly.

Mr. Silverberg estimates the average cost of funds at savings banks was about 10 percent in the second quarter. If market rates stabilized at current levels, the banks would see their cost of funds drop another 1.5 percent by early next year. Since most banks are losing less than 1.5 percent on their assets, he believes this would put a substantial number into the black.

A lot of banks are hopeful that this will happen. Robert Steele, chairman of New York City's Dry Dock Savings Bank, says a recent drop of 0.5 percent in his bank's interest expense has improved its income statement by $1 million a month. Unfortunately, notes Mr. Steele, this improvement dosen't put the institution into the black. Last quarter, Dry Dock lost $16.9 million. ''The important point ,'' says Mr. Steele, ''is that, as rates stabilize or move lower, many thrifts will move into the black. And, something that no one will write about is that it stabilizes the whole industry, so stronger institutions can come to assistance of weaker ones through acquisition and merger.''

But some savings banks can't react as quickly. Ralph Rivet at Great Western Financial Corporation, a California thrift, reports that ''none of our interest rates have changed in any significant way. Only the six-month and three-month rates have changed since last Monday.'' He concludes: ''We need a sustained period of time for rates to stay down.''

As short-term rates fall, the thrifts are hopeful that some of the $220 billion parked in money-market funds will start to head their way. Jerome Baron, an analyst with Merrill Lynch, says he believes this will happen. Savers will lock up their funds in 21/2-year certificates, currently carrying an interest rate of 11.95 percent, or a yield to maturity of 13 percent, he says. ''I think they will cannibalize the money-market funds,'' says the analyst.

The thrifts are also hopeful that they will get help from Congress, as well as from the financial markets. The Senate Banking Committee recently approved legislation that would allow thrifts to prop up their net worth. The FDIC or FSLIC would accomplish that by purchasing an obligation from a thrift institution and allowing the thrift to count the IOU from the government as part of its net worth. Also, over the longer term, the legislation would allow up to 7.5 percent of the thrifts' lending to go for commercial loans made on the same basis as commercial banks.

The bill has already been passed in the House, and it now must be voted on in the full Senate before moving on to House-Senate conference. The changes the bill includes, combined with the thrifts' ability to hedge their short-term liabilities in the futures markets, says Ms. Chamberlain, should give them ''the flexibility they need'' to prevent them from sinking during the next upward cycle in interest rates.

Should lower interest rates and legislative changes not help the thrifts, they might be able to call on the commercial banks. The Federal Home Bank Board recently granted New York's Citibank permission to buy the financially troubled Fidelity Savings Bank, a San Francisco bank with $2.9 billion in assets and 81 branches in the state. However, Citibank must receive approval of the purchase from the Federal Reserve Board and win a number of lawsuits filed by California banks that are trying to halt the New York bank's incursion into their territory.

Merrill Lynch analyst Baron says Citibank is interested in buying the thrift because this would give the nation's second-largest bank a beachhead in California, once interstate banking is permitted. Furthermore, says Mr. Baron, who formerly worked at the Federal Home Loan Bank Board, ''By bailing out a thrift, they build up Brownie points with the regulators. And I know that Brownie points count.''