Thrifts, which have been moving away from being portfolio lenders and toward consumer banking in fits and starts since the 1980s, are continuing steadily in that direction, but the road is proving to be a rocky one.

Thomas O'Donnell, a Salomon Smith Barney thrift analyst, said thrifts faced a lot of risk as their transition continued. "If it doesn't pay off, I think that the consequences can be pretty costly and the changeover is not an easy thing to do, especially at this point in time," Mr. O'Donnell said.

"But, I think the real danger is that you can get caught between being a traditional thrift and trying to be a commercial/consumer bank and that's really no-person's land. There is no future there."

Mr. O'Donnell said investors were leery of the risk of thrifts' hiring more employees or putting in new systems for a payoff that may never materialize.

"You are going from a commodity business, which is mortgage lending, to a highly competitive business. And the implementation can be very complex and difficult," Mr. O'Donnell said.

"There was more opportunity a few years ago and companies that moved in the early 1990s are making pretty good progress now. "

Mr. O'Donnell said that the biggest problem was the heightened competition among lenders to go after high-yielding consumer and commercial loans, in an environment of homogenized players.

It is very hard to differentiate a thrift from the competition if it is a latecomer to the game, he said. Mr. O'Donnell advised that the best road to take upon transition from the classic thrift model would be to step into the role of community banker.

"They are not going to be making the big-ticket loans that the big commercial banks are making. It's more of a middle-market kind of a business that they should be looking for," Mr. O'Donnell said.

"If they stay in that niche, they are better off than if they try to compete. You know they won't get those large-ticket loans to large companies - it's not part of the strategy. "

Anthony Nocella, vice chairman and chief financial officer at Houston-based Bank United, has a different version of a successful strategy.

His company ranks eighth among thrift holding companies, according to American Banker data, with $14.8 billion of assets last year and nearly $7 billion in deposits.

Though Mr. Nocella defined Bank United as a "middle-market lender" and a "major Texas community bank," he said he considers his only competitors to be large commercial banks. He added that his company was able to beat out larger competitors because it was able to concentrate on niches.

"We want to transition more to commercial lending and basically keep a base of single-family loans. When interest rates go down, people prepay away from the bank, so it's a very volatile asset from the standpoint of its paying power," Mr. Nocella said. "The only assets we keep on portfolio are adjustable-rates. I'd say of the $3 billion we've originated in the nine months of this year, 80% of that was fixed-rates that were sold. "

"Our basic dynamic is to consistently, continuously increase the consumer and commercial loan portfolio and the transaction account, and sell all of the fixed-rate and lower-yielding assets," Mr. Nocella said. "I would say that in the long run, it is better to sell mortgages than to hold them. "

Fifth-ranked Dime Bancorp is a $23 billion-asset thrift based in New York.

It is a prime example of thrifts becoming less thrift-like, especially in light of its September merger with $10 billion-asset Hudson United, a regional bank based in Mahwah, N. J. In a report, Mr. O'Donnell said that following the merger, Dime could convert to a bank and hope for a bank-like price-earnings multiple.

Mr. O'Donnell's report said: "Thrift valuations have gone nowhere very fast recently. The industry is out of favor. " It continued, "The negative of being a former thrift will take a long time to go away. Unlike the early 1990s, boredom has replaced opportunity. "

Bank United may be on the same wavelength. Mr. Nocella commented, "Dime Savings is on the same model that we're on. "

Thrift and banking consolidation has been the inclination of many companies, and Mr. O'Donnell said opportunism was the name of the game.

"Up until a year-and-a-half ago, when the whole industry fell out of favor with investors, the companies that did well won big and the companies that didn't do well got penalized," Mr. O'Donnell said. "There was a lot of takeover activity of companies that were caught in between, but if you're going to do it, you have to do it opportunistically. You have to take what the market gives you. "

The chairman of GreenPoint Financial Corp., Thomas F. Johnson, agreed that thrifts seeking higher returns had to be more aggressive and get away from strategies of the past.

The New York-based thrift is ranked ninth, with about $14 billion of assets and $11 billion in deposits, according to American Banker data.

"The mortgage lending market has become so commoditized, particularly with the strength of the agencies, that a lot of the profit has been driven out of the business, so you really can't make much money playing that game anymore," Mr. Johnson said.

But he agreed with Mr. O'Donnell that "it would be a mistake to try to compete directly with the big banking companies, if you're a thrift, on anything that the big guy wants to do - because he's going to inevitably win. "

Mr. Johnson said that thrifts should look for characteristics that make a product local, because they can better relate to their community than the megabanks. But he warned that "you'd better build all the skills that are required in order to do that kind of business before you put very much of it on your balance sheet. It is a risk-oriented business. "

The top-ranking thrift-cum-bank, Washington Mutual Inc. of Seattle, held about $165 billion of assets last year and about $85 billion in deposits.

Though Wamu is the most successful of the thrift holding companies, its president of mortgage banking and financial services groups, Craig Davis, said the company was not trying to de-emphasize its classic thrift model of business.

Mr. Davis said that Wamu - made up of several thrifts, including the original Washington Mutual; American Savings; Great Western Financial; and Home Savings of America - sees its capabilities in terms of portfolio lending as an advantage over other similar companies.

"We have the capital, we have the ability to manage the risk associated with portfolio lending, and we leverage our portfolio capabilities to actually help us to do more mortgage banking activities," Mr. Davis said. "We see that there is a real synergy between the two types of lending. "

Mr. Davis explained that some aspects of the more traditional model of thrift business were advantageous. He said mortgage bankers might see volume increases when fixed rates were very low, but as soon as they began to rise, production was adversely affected as the market shrank.

"We find that when rates go up, we do a higher percentage of portfolio loans, like adjustable-rate mortgages which we hold in portfolio, which keeps our lending machine well-oiled," Mr. Davis said. "So we don't have the same ups and downs, the heights or the valleys in our production. "

However, Mr. Davis is quick to point out that Wamu is not by any means your mother's model of thrift business.

"Last year, about 45% of the single-family mortgages we made were portfolio loans, and 55% were sold - they were secondary-market products," Mr. Davis said.

"But it's now more like about 65% are portfolio on a year-to-date basis, with the balance being mortgage-banking type products. "

When thrifts got in trouble in the early 1980s because of skyrocketing short-term interest rates, regulators allowed them to dabble in many areas of finance.

Most did not have the management or the skills to pull it off and ran into trouble.

The early 1990s brought leadership experienced in other banking sectors to many thrifts, and as the industry consolidated, greater size allowed them to do more.

Though Mr. Johnson voiced concerns regarding the thrift industry, he said there were advantages to having a hybrid business.

"The advantage we get from having a $15 billion balance sheet, which comes from being a thrift with deposits in New York, is that we have all of those options available to us, rather than having to sell everything all the time. "

Mr. Johnson said that when thrifts and commercial banks consolidate with each other, the easy part is getting all the deposits together and protecting them.

The hard part is creating a loan origination business that adds real value.

He said the capital markets were eager to buy up anything that could be securitized. "The kind of stuff that gets driven out by the capital markets - what's left for people who want to buy and hold - is very difficult to find," he said.

To be sure, Mr. Johnson agreed with most observers that change is inescapable for the thrift industry.

"The continued growth of both the capital markets and housing, of Fannie Mae and Freddie Mac, and of the home loan banks is inevitable.

"Their appetite for growth is such that profitability of just conventional mortgage lending is going to be driven so low for anybody other than the very biggest players," Mr. Johnson said.

"Thrifts are going to have to change or settle for inferior returns. I think they know that, and that's what the better, more aggressive thrifts have been working on for a lot of years. "

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