Fee income helped Western thrifts meet earnings expectations in the third quarter despite a difficult interest rate environment.
"The defensive strategy is developing alternative sources of income, so if the music stops on interest rates you don't get caught," said Charlotte A. Chamberlain of Jefferies & Co., Los Angeles.
Washington Mutual Inc. and Downey Financial Corp. were among the thrifts whose fee income helped offset compressed margins. Third-quarter income from deposit-account and other retail fees at Washington Mutual, the largest thrift in the nation, climbed 31%, to $121 million; Downey, a $5.8 billion-asset thrift, posted a 21% increase, to nearly $10 million.
Downey, based in Newport Beach, Calif., also benefited from a strong subprime auto loan operation, said Michael Abrahams of Sutro & Co. in San Francisco. "Downey managed to hold its margin flat," thanks to the auto loans," Mr. Abrahams said.
Western thrifts also continued to suffer runoff from their adjustable rate mortgage portfolios because of high levels of refinancing, analysts said. But the lost revenue from these departing assets were offset, in part, by gains from selling fixed-rate loans.
San Francisco-based Golden State Bancorp, for example, sold $1.8 billion in loans, a 40% increase over the same period a year earlier.
"The fact that thrifts have been taking their fixed-rate loans and selling them off really helped," said Thomas O'Donnell, an analyst with Salomon Smith Barney in New York.
A few thrifts, such as Firstfed Financial Corp. in Santa Monica, Calif., took the opposite tack and focused more on boosting interest income than fee-based revenues.
In the third quarter, fee income at the $3.8 billion-asset thrift declined 19%, to $1.3 million. But net interest income climbed nearly 5%, to $1.1 million. This helped boost net income 49%, to $8.8 million.
Firstfed's results were also buoyed by the strong California economy, which allowed it to shrink loan loss provisions.
Several other thrifts, including Golden West Financial Corp. in Oakland, did the same. The parent company of World Savings decreased its loan loss provision by 69%, to $3 million.
Smaller thrifts - those under $500 million of assets-generally did not feel the margin pressure that their larger competitors did, said Erica L. Hill, an analyst with Pacific Crest Securities in Seattle. These institutions generally benefited from a move toward a more bank-like asset mix.
"Thrifts in this class managed to keep their margins in better shape than expected," said "They are shifting to higher-yielding, bank-like loans."