S&Ls; Post ’91 Profits Close to $2 Billion

Federal regulators said Tuesday that falling interest rates and government takeovers of troubled thrifts helped the nation’s savings and loan industry earn nearly $2 billion in 1991, putting an end to four years of massive losses.

Timothy Ryan, director of the Office of Thrift Supervision, termed the performance “a milestone.” He said the industry is stabilizing after being rocked by hundreds of failures caused by bad loans, risky investments and widespread fraud.

“I believe we are now in the eighth inning of the cleanup process,” Ryan said at a news conference.

Still, there are pockets of concern. While California’s private-sector S&Ls; were profitable last year, the percentage of bad real estate loans grew slightly. Also, several of the state’s largest thrifts are unprofitable and have low capital cushions.

The OTS said the 2,096 private-sector institutions earned $1.97 billion in 1991, compared to a loss of $2.9 billion in 1990. The industry recorded losses of $43.3 billion in the four years beginning in 1986.

Ryan said nationwide the number of financially crippled thrifts, headed for seizure by the government, is dwindling rapidly. In December, 1989, regulators listed 377 thrifts with assets of $261 billion as candidates for failure; today, there are only 55 with $35 billion in assets.

In the last three years, more than 600 S&Ls; have been seized and dismantled by the Resolution Trust Corp., which sells the assets and pays off depositors. The government has spent $80 billion on the S&L; cleanup, and could ultimately spend more than $400 billion.

With the crippled S&Ls; handed over to the government, the vast majority of the remaining privately owned thrifts are growing in strength. They are bolstering their capital to meet strict new government standards and reaping the benefits from the big spread between the low interest they pay on deposits and the higher rates they can charge for mortgages.

“The restructuring over the past two years has been very successful in clearing away the failed institutions and permitting a solid core of well-capitalized, well-managed institutions to conduct profitable operations,” said Fred Webber, president of the U.S. League of Savings Institutions, an industry trade association.

The industry’s 1991 profits represented a dramatic turnaround from the losses in recent years. The last profitable year was 1986, with meager earnings of $131 million. Each quarter during 1991 was profitable, something that last happened in 1985.

California’s private-sector thrifts earned $218.4 million last year, a dramatic improvement from a loss of $887.9 million in 1990. The state’s thrifts lost $1.97 billion in 1989, and the last profits, $717 million, came in 1988.

“The private, healthy institutions that have concentrated on good management and focused on the business of home lending have led us back to profitability,” said Jay Janis, president of the California League of Savings Institutions.

The profit figures for California included a strong fourth quarter when earnings surged to $238.3 million, compared to a loss of $763.5 million in the same period a year earlier.

But California S&Ls; had a slight increase in overdue real estate loans during the fourth quarter. Ryan said the delinquency rate of 2.89%--up from 2.47% a year ago--was still far lower than the rate in several northeastern states hard-hit by recession.

The state also has several large institutions which the OTS classifies as “troubled with poor earnings and low capital.” Regulators are hopeful they can avert the failure and seizure of some big thrifts through an early resolution program in which the government provides financial aid to attract buyers for the ailing institutions.

Ryan, the author of the early resolution plan, says it will cost the taxpayers less if buyers can be found quickly for the weak thrifts rather than waiting until they suffer deep financial losses and must be seized by the government. Direct takeovers of S&Ls; would throw additional billions of dollars worth of real estate and other assets into an already depressed market.

He will present his plan next month at a meeting of the oversight board of the RTC, which would supply the funds to guarantee buyers of weak thrifts against losses from the troubled real estate portfolios.

While S&Ls; are reaping the benefits of lower interest rates, there are signs that rates may rise later this year. Ryan said thrift managers should avoid becoming excessively dependent on this source of expanded profits.

“We will inform all CEOs (chief executive officers) we are not interested in a rerun of the 1980s,” said Ryan. During the early part of the decade, thrifts were whipsawed as they paid out high interest rates, but collected low interest on long-term fixed mortgages.

Only about 10% of the S&Ls; are likely to be dangerously exposed to a sharp swing in rates, and the big thrifts are not included in this group. The major institutions have become adept at packaging their fixed-rate mortgages, and selling them as securities. They get new funds this way, and remove the mortgages from their books in case interest rates rise sharply.