Thrift stocks struck out with investors during the first half of the year, but commercial banks posted solid gains.

The American Banker index of the stocks of the top 50 commercial banks rose 10.26%, versus a 3.18% decline for thrift stocks.

"The thrift group overall has just about been out of favor," said Kevin Timmons, a bank and thrift analyst at First Albany Corp. "A lot of the momentum dollars came out of the group" as investors sought more promising sectors.

The lack of investor interest showed up in lagging stock prices at yearend and continued into this year. "As we got into 1999 there was no reason for anyone to get excited," Mr. Timmons said.

He said first-half earnings, though growing at a decent pace, could not sustain the momentum they had last year.

Thrifts "have not seen an awful lot of earnings growth," said Thomas F. Theurkauf, a banking analyst at Keefe, Bruyette & Woods Inc.

"They're lagging behind because of interest rates and the fact that they're still seeing prepayments," said Charlotte Chamberlain, a thrift analyst at Jeffries & Co.

People generally prepay their mortgages to get a new loan at a lower interest rate. When that happens, thrifts get stuck with a less profitable asset.

Or they lose the asset altogether if the borrowers get their next mortgages from another bank.

"A lot of the relative performance of thrifts is tied to interest rates," said Salvatore J. DiMartino, a banking analyst at Advest. "Prepayments because of low interest rates helped push profits down."

At the same time, "a lot of the performance of thrifts is tied to the lack of takeovers in this sector," he said. "We haven't seen much during this year."

This year, thrifts were also coming off a period in which mortgage volume was the best it's ever been. Things slowed down in 1999, especially in the second quarter as interest rates started inching up.

With mortgage originations, "we're not having a repeat of 1998 this year," Mr. DiMartino said.

"With rates ticking up, for all intents and purposes, the thrift stocks suffered."

Mr. DiMartino predicted that mortgage originations will fall by about 20% this year, to $1.3 trillion.

"At this period in the mortgage cycle, some people feel they would rather put their investment dollars elsewhere," Mr. DiMartino said.

But "thrifts are going to have a terrific second half of the year," he predicted.

The analyst said that when rates are rising there is a shift in consumer preference to adjustable-rate loans and that will push more loans into thrifts' portfolios.

Also, "between now and next summer you'll see a lot of takeover activity," Mr. DiMartino said.

Mr. Timmons of First Albany also said he expects better things. "If the markets cooperate and don't do anything strange," he said, the upcoming quarter will be pretty good.

"If we enter a benign environment, I think thrifts could do well," Mr. Theurkauf said.

"I wouldn't look for another leg down unless we believe we're in for a string of rate increases."

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