LOS ANGELES - Conventional wisdom holds that rising interest rates should be good news for California thrifts, which are aggressive adjustable-rate lenders.

But Wedbush Morgan Securities thrift analyst Charlotte Chamberlain says higher rates in 1995 will create only new disappointment for shareholders and stymie the consolidation of the thrift industry - something she calls inevitable.

The reason is simple: California thrifts have been too aggressive in offering super-low starter rates on popular ARMs, in attempt to retake market share from mortgage bankers. Now, even as mortgage rates rise, they will not keep pace with increased deposit rates.

The bad news is not confined to home mortgages. Ms. Chamberlain, a former thrift executive and economist, says that several thrifts could see new problems develop as rising rates boost the cost of multifamily mortgages at a time when landlords have little ability to raise rents.

The good news, she says, is that depressed earnings continue to make the case for some of the state's thrifts to be bought out. In particular, Ms. Chamberlain believes that H.F. Ahmanson and Great Western Financial offer strong consumer franchises totaling $93 billion in assets to out-of-state buyers. She also says an acquisition of either by Los Angeles-based First Interstate Bancorp. would give the bank a strong No. 2 statewide franchise in California.

However, she acknowledges that rising interest rates combined with uncertainty over the possible merger of the two deposit insurance funds have stalled such deals for now.

"Ultimately, you can't keep returning a subpar ROA or ROE and remain independent," she said. "Ultimately, it means you have to consolidate."

Q.: What is your outlook for Southern California thrifts?

CHAMBERLAIN: At this point, with interest rates in the current level, the yield curve is so flat that the California thrifts are going to have at least another two quarters of pretty disappointing earnings. I did a table in one of my reports in which I looked at the thrifts in 1986, which was their best year, versus September of this year, when the yield curve was very similar.

Basically, what's happened is the zombie thrifts have clearly been taken care of. The CD rates are clearly 200 basis points lower than when Charlie Keating and those characters were around. But the start rate on ARMs is 400 basis points lower, so they are still behind the curve. And where they had a positive 168 basis points back in 1986, in September that declined to a negative 63 basis points. Now it's a negative 110.

Q.: How did thrifts get to that point?

CHAMBERLAIN: So, the problem with thrift earnings is they have tried to recapture the mortgage market from the mortgage bankers by basically underpricing the product. Until that turns around, or the Fed stops pushing the rates up, we're going to see shrinking net interest margins. The flattening of the yield curve is also the leveling of the playing field here. The yield curve is now so flat that consumers are going to be much less reluctant to take an adjustable-rate mortgage than a fixed. They just can't continue to keep offering these deeply discounted loans.

Q.: So what's the shakeout?

CHAMBERLAIN: I think we are already seeing it. The stock prices are so low and the earnings are so disappointing that they have adjusted those start rates up. But they are going to have to give up market share. In the heyday for mortgage bankers, the thrifts here had gone down to about 15% market share. It's back up to about 30%. It's going to retreat probably to a 20% to 25% level as we get to a more normal situation.

Q.: So who is going to be hurt the most?

CHAMBERLAIN: Nobody benefits from this flattening of the yield curve. The ones who are best insulated are Bay View Capital Corp. and Cenfed Financial Corp., they are small institutions. Long-term buys are H.F. Ahmanson and Great Western Financial, simply because of their market share.

The other dark cloud on this interest rate horizon has to do with asset quality. The multifamily market here in California, unlike most of the rest of the country, is still an adjustable-rate multifamily market. Because of the well-known contractual and structural lags in the cost-of-funds index, many of these apartment borrowers have not had significant increases in their mortgage rates.

Q.: Can you quantify the impact?

CHAMBERLAIN: The conventional wisdom is that the cost- of-funds index, even if we have no more increases from the Fed and the rates freeze where they are today, is that there is at least a 100 to 200 basis points more of adjustment. The real question is whether the debt service in these apartments is sufficient to cover these new, higher mortgages. This is largely a Southern California problem.

Q.: Bankers would have you believe the worst is over in the apartment loan market.

CHAMBERLAIN: The nonperformers have been dwindling, but what I am talking about comes six to nine to 12 months from now, when mortgage rates increase and landlords can't raise rents. The companies that really have exposure to that are thrifts like Fidelity Federal, Firstfed Financial, and to a lesser extent Ahmanson, because they still have a fairly large multifamily portfolio. Of course, that would include Glendale Federal and California Federal. To a smaller extent, First Republic Bancorp. up in San Francisco.

Q.: How extensive could the problems could be?

CHAMBERLAIN: In some companies like Fidelity Federal, which just went through a recap and still is trying to regain its legs, it could be critical. But in the others it would just be a drag on earnings.

Q.: Don't you have any good news about thrifts out here?

CHAMBERLAIN: Yeah, for companies like Ahmanson and Great Western the long-term outlook is very good. They have very high dividend yields with strong management and good long-term prospects. But they have very low multiples right now. Ahmanson is selling at about book value. That's why I have long-term buys on them.

Q.: Let's take your coverage list individually. What do you like about Ahmanson?

CHAMBERLAIN: The size, the leverage capability, Charlie Rinehart's very hands-on approach to getting control of expenses. The interstate franchise they have in Florida, New York, and California is very strong. They have more deposits here in California than First Interstate does. So does Great Western. That's why it makes sense for somebody coming into California to buy them. If you bought Ahmanson and Great Western, you could jump ahead of Wells Fargo & Co. in terms of size and be the second largest in California.

Q.: And Firstfed?

CHAMBERLAIN: They are everyone's hometown hopeful. They have gone through significant problems, and they have turned it around with their own, good strong management. They haven't sold (problem assets) in bulk, and with interest rates rising, it is going to be increasingly difficult for them to get rid of these remaining non-performing assets. And, I think some of their performing assets may well be challenged going forward, because of the inability of landlords to raise rents while mortgage rates are going up.

Q.: What is your view on Golden West?

CHAMBERLAIN: They are certainly among the top three in management. But that company needs an acquisition in order to put it into real contention in terms of earnings growth. I think there is just not sufficient internal earnings momentum going forward. But that doesn't seem likely at this point. It seems like we are completely stalled on the acquisition front here in California.

Q.: How about Great Western?

CHAMBERLAIN: Great Western again is, in terms of large-cap acquisition candidates, always one of the top ones I look at it. Simply, it has a very banklike structure. It is really underperforming in terms of earnings, and its cost control continually disappoints me. Anyone coming in could have a significant opportunity to turn that thing around just by carving out excessive costs.

Q.: Is the thrift charter a deterrent to that kind of deal?

CHAMBERLAIN: Of course it is, with the FDIC hanging in abeyance this issue of whether they are going to kick the bank deposit insurance premium down to 5 cents (per $100) while leaving thrifts' (rate) between 23 and 33 cents. I think that's a large reason why we have seen as few acquisitions of thrifts as we have.

There are two things affecting that really.

One is that the overall level of rates makes the deposits of thrifts less attractive to banks; they are still predominantly time deposits, as opposed to demand deposits.

And then there is the BIF-SAIF issue. It is not an insignificant issue if the banks actually go down to 5 cents.

Q.: Would that deposit insurance differential be the death of thrifts?

CHAMBERLAIN: It would obviously winnow down the industry. It would winnow down profitability, and therefore winnow down the amount of capital flowing into the industry. Certainly, through a back door, it would accelerate the consolidation of thrifts.

Is it fatal for the entire industry? That seems to be overstating it.

Q.: About a year ago you were one of the first to call attention to potential bargain acquisitions among thrifts. Has your view changed?

CHAMBERLAIN: The (low) valuations are still there. Until the BIF-SAIF (deposit insurance premium) issue gets resolved, it is still the best, cheapest way to build a franchise in California.

No matter what market you are in when you come to California, you have BankAmerica in your face with 25% market share and there is really no point coming in and getting 1% market share. And, there is really no region you want to be in over another; you really want to be statewide.

Q.: You keep talking about someone buying both Ahmanson and Great Western. How likely is that, really?

CHAMBERLAIN: That does take a whole lot of optimism. But buying either one could give you a good consumer franchise.

Q.: Is First Interstate the most logical instate buyer, and at what price?

CHAMBERLAIN: Yes. I think it would have to between 175% and 200% of tangible book value on either. For Great Western that's $26 a share. For Ahmanson that is somewhere around $30 to $32 a share. If First Interstate took either one, it would put them ahead of Wells in market share. That would make them a strong second to BankAmerica.

Q.: Can you see any circumstances under which this consolidation among big thrifts wouldn't happen?

CHAMBERLAIN: Not really. I can't really see a new Republican Congress being too worried about antitrust concerns. At this point, there are some companies that can survive through independence - Ahmanson and Great Western and Golden West, some of the smaller ones can that really have niches. But ultimately, you can't keep returning a subpar return on assets or equity and remain independent. Ultimately, it means you have to consolidate.

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