Adjustable-rate loans spur first asset growth since '88 at top thrifts.

Thanks to rising demand for adjustable-rate home loans, the nation's major thrifts are growing for the first time since the industry's crisis in the late 1980s.

An American Banker survey shows that the top 300 thrifts increased assets by 0.4% in the first six months of this year.

Until this year, the group had been shrinking steadily since 1988.

Analysts and executives attributed the gains to mergers and the pickup in adjustable mortgages, long the speciality of large thrifts.

With interest rates on fixed mortgages rising, consumers have increasingly opted for adjustables, which carry lower initial rates.

"If thrifts aren't doing adjustable-rate mortgages, they ain't growing," said Bruce W. Harting, a Salomon Brothers analyst.

In a sign of the times, Mr. Harting recently renamed a quarterly report that, since 1990, he had entitled "The Incredible Shrinking California Thrifts." The new name: "The Incredible California Thrifts Shrink No More."

Indeed, the major thrifts have been growing by almost any measure -- deposits, branches, staff and capital.

By contrast, many of the thrifts intentionally reduced asset bases in the wake of the 1989 thrift bailout law.

The idea was to meet toughened requirements for capital-toassets ratios.

Then, during the mortgage refinancing boom of the past two years, mortgage banking companies stormed in and grabbed market share from thrifts.

Mortgage companies generally excel in fixed-rate loans, and those loans surged in popularity as rates dove to the lowest level in a generation.

The result: assets at the top 300 thrifts plunged 31% in the six years through 1993. And the industry's total assets fell by 37%.

This year's rise in interest rates has clearly helped stem the decline. For one thing, it has made thrifts certificates of deposit more attractive to investors than mutual funds, said Ray Martin, chief executive of Coast Federal Bank, Los Angeles. That, in turn, provided thrifts with 'plentiful funds to lend.

Higher interest rates also have reduced the number of loans that prepay before their maturity.

Last year, prepayment rates skyrocketed as homeowners paid off loans to take out new ones at low rates.

"Pan of being able to grow your assets is being able to control the runoff in your portfolio," said Gary W. Brummett, executive vice president, California Federal Bank.

But he and others said the biggest boost to assets has come from the swing in consumer preference to adjustable-rate mortgages.

Adjustables now account for nearly half of all new home loans, up from 24% at the beginning of the year, according to the Federal Housing Finance Board.

Some thrifts have turned up their asset growth more in the just the past few months. At Florida's Coral Gables Federal Savings and Loan Association, the loan portfolio grew 3% in the quarter ending Sept. 30, to $2 billion, said Walter F. Hinson, chief executive. Over its fiscal year, which ended the same day, the thrift's loan production shot up 27%.

Despite such gains by major thrifts, the thrift industry as a whole has continued to shrink. In the first six months of this year, the total number of savings banks and savings and loan associations fell by 92, to 2,235 as smaller players either merged with each other or were acquired by bigger institutions.

Total assets, meanwhile, fell by about 1%.

Even for the bigger thrifts, the gains in assets may not translate into profits -- at least not immediately. Richard K. Strauss, an analyst at Goldman Sachs & Co., said the asset growth at the 15 thrifts he covers is overshadowed by weakening net interest margins.

He said thrifts have had to cut into the margins in order to "in effect subsidize new production at very low rates."

That will remain a problem over the next several months, he said.

But for the long run, he and others say, the asset growth should prove to be a boon.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER