Thrift Earnings Withstand 1Q Refinancing Boom

Large thrifts easily weathered the first quarter's mortgage refinancing boom and flat yield curve, beating analysts' earnings estimates in many cases.

Using extensive origination networks, thrifts such as Charter One Financial Inc. and Washington Mutual Inc. generated a strong flow of adjustable-rate mortgages that at least partly offset the spike in prepayments.

Most also increased their net interest margins, as they increased the proportion of higher-yielding auto, home equity, and other consumer loans.

The unexpectedly strong results suggest that thrifts have made a successful adjustment since 1993, when a refinancing boom decimated earnings.

Thrifts are drawing from their experience of the previous boom, said analyst Thomas O'Donnell of Salomon Smith Barney. Moreover, they "don't have the backdrop of capital shortages and asset concerns" that persisted in the early '90s - a lingering legacy of the previous decade's thrift crisis, he said.

"I've been through five or six of these flat yield curves," said Charles John Koch, chairman of Charter One. "They're not fun, but they're not the end of the world."

At Astoria Financial, net interest margin increased to 272 basis points for the quarter, from 270 basis points in the fourth quarter. At Dime Bancorp, the margin jumped to 263 basis points, from 256.

At Greenpoint, the margin increased to 393 basis points, from 391. And at St. Paul Bancorp, it went up to 296 basis points, from 282.

Industry leader Washington Mutual was among the few whose margins shrank; it went to 296 basis points, from 301.

Cleveland-based Charter One illustrates many of this quarter's earnings trends at thrifts. It reported net income of $63.5 million, up 21% from a year earlier. Its annualized return on equity was 18%, and its return on average assets was 1.28%.

Net interest income increased 9.8%, to $141.4 million. The net interest yield was 2.98%, up 10 basis points from the preceding quarter. The size of Charter One's loan portfolio was virtually unchanged, from $12.7 billion on Dec. 31, 1997, to $12.8 billion at March 31.

The company compensated for the runoff of higher-coupon mortgages by funding its loans more cheaply and increasing its proportion of consumer and business loans. Mortgage loans fell to 63.5% of total loans, from 65.8% at Dec. 31. Mortgage prepayments at Charter One are expected to remain high in the second quarter.

Charter One originated $2.2 billion of loans and leases in the first quarter. Residential loans made up 65% of that total, and the rest were consumer and auto loans. Consumer loan production was up 125% from a year earlier, to $378 million. Auto loans were up 21%, to $273 million.

The thrift also boosted noninterest income, largely due to an increase in checking accounts and retail banking revenue. Noninterest income totaled $40.1 million, up 26.5% from a year earlier.

H.F. Ahmanson & Co., which agreed in March to sell itself to Washington Mutual, also had a strong quarter. Net income was up 11% from a year earlier, to $114.3 million.

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