What's behind the S&L shakeout: too many thrifts - and too much capital - lead to consolidation.

L.A. COUNTY - Fasten your seat belts, the savings and loan takeovers have begun - and it's likely to affect Southern California thrifts in a big way.

After years of failed deals and wild rumors, Washington Mutual Inc., the Seattle-based, $22 billion-in-assets thrift, was first out of the starting gate by announcing last week a proposed takeover of Irvine-based American Savings Bank in a deal worth $1.2 billion.

Then, before the dust settled, speculation intensified late last week that San Francisco-based First Nationwide Bank was close to acquiring Los Angeles-based Cal Fed Bancorp Inc. Sources said an announcement could come as early as July 26 or July 29.

"In light of what has transpired, this can kick off a flurry of other transactions in California," said Tom Therkauf, an analyst with Keefe, Bruyette & Woods, a New York investment firm that specializes in banks and thrifts.

Two local thrift executives, Ray Martin, chairman and CEO of Coast Federal Bank, and Stephen J. Trafton, chairman and CEO of Glendale Federal Bank, said the Washington Mutual acquisition will spur more deals in California.

"I think there is a potential for both in-state and out-of-state buyers," Trafton said. "But the big change on the horizon is out-of-state buyers."

Martin, meanwhile, predicted more consolidation among California thrifts.

L.A. County is the home of the nation's biggest thrifts, including Irwindale-based Home Savings of America, the No. 1 thrift with $50 billion in assets, and Chatsworth-based Great Western Bank, No. 2 with $41 million in assets.

Then comes the "second tier" of thrifts: Cal Fed with $14 billion in assets; Glendale-based Glendale Federal with $14 billion in assets; and Coast with $8 billion in assets.

These thrifts are considered attractive targets for acquisition because they hold billions of dollars worth of deposits and have loyal customer bases.

Therkauf said that while the thrifts have value, there's just too many of them.

"Just walk down Wilshire Boulevard there are too many players in the market and too much capital," he said.

Meanwhile, thrift shareholders have been pressuring management to sell because "profit margins have been narrowed down to the bare minimum," said Campbell Chaney, an analyst with Rodman & Renshaw in San Francisco.

"It's a terrible business," he said.

Most of the big thrifts are earning "far less than what banks have been earning," said Joe Morford, an analyst with Alex. Brown & Sons in San Francisco.

Chaney predicted that four of the five big L.A. County thrifts will be gone by the end of the century.

"Cal Fed is probably gone Monday," Chaney said. "GlenFed wishes they would go today. And Coast will probably be the last to go," he said.

Chaney said that Home Savings, which just began a new strategy of becoming a consumer bank, is the least likely takeover target because the company is in the middle of a costly transition. He compared buying Home Savings to buying a building that's only half-built.

"If you want to vote for the most likely takeover target, you have to vote for Great Western," Chaney said. "Great Western is really the crown jewel (of the Southern California thrifts). Everybody wants it."

For the last few years, California thrifts have been posting returns on assets of about 0.5 to 0.7 percent and returns on equity in the range of 10 to 11 percent, he said. Wall Street expects an ROA of 1 percent and an ROE of 15 percent.

Charlotte Chamberlain, a thrift analyst with Wedbush Morgan Securities in Los Angeles, said that thrift consolidations will result in an improved bottom line by slashing costs.

Both Chaney and Chamberlain agreed that the Washington Mutual-American Savings deal would result in layoffs - as would a possible merger of Cal Fed and First Nationwide.

But the layoffs "won't be of the magnitude" of the recent Wells Fargo Bank-First Interstate Bank merger, Chaney said.

Thrift mergers also may involve consolidating back office space, but few branch closures, they said.

"I only know of one person who is losing his job in the American Savings deal, and that is Mario Antoci," Chaney joked. Antoci, one of the most well respected thrift industry executives in the nation, will retire as CEO of American.

What does it mean for customers?

"It's always bad for a community when there is a merger," said Robert Gnaidza, director of the Greenlining Institute, a San Francisco-based consumer and minority rights group that lobbies banks and thrifts to commit to lending in under-served communities.

"It's bad because you have, by definition, absentee ownership - every merger involves one geographical area being slighted over another," he said. "And it's bad because the new institution is more focused on the bottom line, because the dynamics of the merger are cost savings."

But Chamberlain said the current consolidation wave could actually mean "good news to California bank customers because it means a higher level of competition."

She noted that Washington Mutual, American Savings, First Nationwide and Cal Fed are all thrifts that concentrate on the home mortgage business.

If there are two new bigger and stronger competitors in the already competitive mortgage business "it will put more pressure on spreads and the ability to get deposits," she said.

"Consumers should see more freebies" from thrifts fighting for customers, she concluded.