Consolidation has helped thrifts become more efficient, and shaken up the top rankings in the last year.

Through its acquisition of Great Western Financial Corp., Washington Mutual Inc. zoomed up to the No. 1 spot in American Banker's annual survey. (See tables, pages 11-13.) The Seattle-based thrift's assets grew to $71 billion at June 30, from $24 billion a year earlier. Its efficiency ratio improved to 46.72%, from 49.80%.

And that does not include its acquisition of H.F. Ahmanson & Co., the holding company for Home Savings of America of Irwindale, Calif. The deal closed Oct. 1, after the survey period ended. Home Savings had been ranked second, with $53 billion of assets.

Consolidation is "the way to capture the most value from the franchises," said Jonathan E. Gray, analyst at Sanford C. Bernstein & Co. "In some instances the profits of a target company can potentially be elevated by as much as 40% to 50% if cost cuts are effected" in mergers of thrifts operating the same markets.

Acquisitions have "allowed us to quickly become a player on a national scale," said Craig S. Davis, executive vice president of lending and financial services at Washington Mutual, which now operates in 29 states from coast to coast. The Great Western deal in particular "gave us significantly more market in which to grow share on a national basis."

Growth of industry assets has been slow in recent years-only 1.57% in the last year, to $1.04 trillion-because of the difficulty of originating adjustable-rate mortgages, Mr. Gray said. "It has been very difficult for thrift executives to grow their businesses prudently without accepting undue interest rate risk."

Since the 1980s most thrifts have preferred to hold adjustable-rate mortgages in their portfolios rather than fixed-rate loans, which can subject them to interest rate risk.

But in the current environment, consumers want to lock in low rates, and adjustable-rate mortgages account for just 11% of all conventional loan applications, according to the Mortgage Bankers Association of America's latest weekly survey.

Mr. Davis said Washington Mutual has found demand for adjustable-rate mortgages, even in this environment. ARMs make up 50% of the thrift's originations, and last month it took more than $2 billion worth of ARM applications.

A significant portion of those applications, he said, were for "option ARMs," loans with very flexible payment schedules. These are attractive to entrepreneurs, people who get paid on a commission basis, and others who want the option to defer payments.

"There must be something good going on because if we lost all those thrifts and we still have an increase in assets in total, it tells me the industry's pretty healthy and is growing at some pace," said Charles John "Bud" Koch, chairman of Charter One Financial Inc. of Cleveland, whose thrift subsidiary Charter One Bank climbed six spots, to No. 6 in the rankings.

Charter One Financial is working to increase the share of loans on its books that are not residential mortgages; this category grew to 42% in September, from 34% last December. The endeavor to become less dependent on mortgages "is being helped along by the flat yield curve," Mr. Koch said. "The marketplace is not giving us ARM loans, and if you're not generating a lot of ARM loans you're not finding a lot of residential assets you want to keep."

However, the yield curve has been steepening in recent weeks, and if that continues, "we may see a bit of an increase in ARM loans in 1999," Mr. Koch said.

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