S&L; Industry Decline Speeds Up : Thrifts: Regulators say the number of healthy institutions fell sharply in the quarter. And the situation could get much worse if the real estate markets continue to skid or if the U.S. falls into recession.


The deterioration of the savings and loan industry accelerated during the first quarter, with a sharp decline in the number of profitable thrifts rated healthy by the federal government, regulators reported Thursday.

Nearly a third of all industry assets--$335 billion worth--are now held by thrifts that could easily collapse into insolvency, according to a special report by the federal Office of Thrift Supervision, which regulates S&Ls.;

“The economy is in flux,” OTS Director Timothy Ryan told a news conference. “If we have a recession, or if real estate markets continue to deteriorate, it will affect the thrift industry significantly.”

The OTS has divided the S&Ls; still operating in the private sector into four categories to help with its regulatory handling of the increasingly fragile industry.


Officials are disturbed at the slippage in the number of Group 1 S&Ls;, the institutions that make profits consistently, meet federal capital standards and are soundly run with a strong loan portfolio.

There were 1,175 thrifts with assets of $363 billion in this category at the end of March--a sharp decline from the 1,264 institutions with assets of $404 billion at the end of last year.

“Given the slowdown in the economy and the real estate market in many sections of the country, we are not surprised by the slippage in the healthiest group,” Ryan said. The 89 thrifts that fell from the highest ranking were downgraded to other categories because of a variety of flaws, including insufficient capital, operating losses and large numbers of loans on the verge of default.

In the second-ranked category were 680 thrifts, many failing to meet capital standards. They had assets of $351 billion at the end of March, compared to 620 S&Ls; holding $326 billion in assets at the end of last year.


However, the first two groups generally are “in good shape and by and large should be survivors,” Ryan said. But, he admitted, “we don’t know how many will make it"--that is, stay healthy enough to avoid a federal takeover.

The OTS does not publicly identify thrifts in the four rating groups. The rating system “is a great tool for me and everybody in the government,” Ryan said. “It’s a very good tool to help make decisions.”

Depositors are protected against losses at weak institutions by federal insurance, which guarantees deposits up to $100,000.

The weakest institutions lack sufficient capital to meet the tough standards required by last year’s S&L; rescue bill, and have large portfolios of real estate loans subject to huge losses in a declining market.


OTS auditors identify the fatally flawed S&Ls; for takeover by the Resolution Trust Corp., the new agency created to deal with the clean-up of hundreds of insolvent thrifts.

The two weakest groups included 598 institutions at the end of March with $335 billion in assets--a disconcerting 32% of all assets held by thrift institutions operating in the private sector.

Both the third category, with 352 thrifts, and the fourth, with 246, represent institutions losing money and lacking the capital required by the federal government. Those in the fourth group have such large losses that they are considered almost certain targets for federal takeover.

Most of the weakest S&Ls; are in Texas, but California has several very large institutions in the most troubled category, Ryan said.


When fourth-category thrifts are too damaged to save, they are sent to the Resolution Trust Corp. Fifty-two insolvent institutions were dispatched in this way from the beginning of the year through June.

There are now 2,453 thrifts remaining in the private sector, with assets of $1.049 trillion, according to the OTS report.

“The job is going to get much tougher to decide which ones go to the RTC,” Ryan said.

There was an encouraging note in the upward movement of some thrifts mired in category four. Helped by outside capital and improved management, 34 S&Ls; moved up a step to the third ranking.


“If they are attracting new investors, it’s a sign that the thrift charter is viable,” said James Grohl, vice president of the U.S. League of Savings Institutions, the chief industry trade group. “We knew some of them (in the lowest-ranking category) would make it.”

GOVERNMENT S&L; RATINGS Federal regulators group S&Ls; into four categories to judge financial health and the potential need for a federal takeover. Rankings of individual S&Ls; are not made public.

Percent of Number Assets industry Rank of thrifts (billions) assets Group One Healthy, making profits, meet capital standards 1,175 $363 35% Group Two Making small profits, some meet capital standards 680 $351 33% Group Three Troubled, many losing money 352 $169 16% Group Four Very weak, candidates for government takeover 246 $166 16%

Source: Office of Thrift Supervision