A flat yield curve has created one of the worst environments for the savings and loan industry since the early 1980s, according to a thrift equity analyst.

"The yield curve is really more of a yield line," Caren Mayer told people attending the NationsBanc Montgomery Securities Inc. investment banking conference here this week. Thrifts generally depend on the differential between short-term and long-term rates to earn a profit.

The flat curve has knocked out the incentive to consolidate the industry and sent thrift stock prices into a skid. By Wednesday's close, savings and loan stocks had fallen 14.7% for the year.

The volume of loan refinancings since Jan. 1 has been huge. But margin compression is not as bad as it was in January, when homeowners flocked to refinance their loans, because many higher-rate loans have already been refinanced, Ms. Mayer said.

"This is a terrible environment for the thrifts," she said. "They have low to no asset growth as well as pressure on their margins."

Thrifts face a twofold hazard, she said. On the one hand, companies concerned about yield may increase the riskiness of their loan portfolios. On the other, companies trying to maintain the size of their balance sheet could encounter risk by redeploying capital to less-profitable lines such as car loans or consumer finance.

Ms. Mayer also said the intense takeover pressure that has buoyed financial stocks, including those of thrifts, seems unlikely to continue at savings and loans.

"Investors are very concerned with the skittish stock market," she said. "They challenge the idea that the company is going to make the numbers to justify these deals."

Ms. Mayer said Sovereign Bancorp, Wyomissing, Pa., agreed to pay a good price for Peoples Bancorp Inc., Lawrenceville, N.J., last week. But Sovereign's stock has fallen to a 52-week low of $12 since the $380 million deal was announced.

"Some people say we won't see the huge premiums for the acquisitions of thrifts until after the Y2K problems have been taken care of," she said.

Ms. Mayer said she expects thrift earnings to come down throughout 1999.

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